PROSPECTUS
JULY 1, 2002
Merrill Lynch Life Variable Annuity Separate Account C (the "Account")
FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
issued by
MERRILL LYNCH LIFE INSURANCE COMPANY
HOME OFFICE: Little Rock, Arkansas 72201
SERVICE CENTER: P.O. Box 44222
Jacksonville, Florida 32231-4222
4804 Deer Lake Drive East
Jacksonville, Florida 32246
PHONE: (800) 535-5549
offered through
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
This Prospectus gives you information you need to know before you invest. Keep
it for future reference. Address all communications concerning the Contract to
our Service Center at the address above.
The variable annuity contract described here provides a variety of investment
features. It also provides options for income protection later in life.
It is important that you understand how the Contract works, and its benefits,
costs, and risks. First, some basics.
WHAT IS AN ANNUITY?
An annuity provides for the systematic liquidation of a sum of money at the
annuity date through a variety of annuity options. Each annuity option has
different protection features intended to cover different kinds of income needs.
Many of these annuity options provide income streams that can't be outlived.
WHAT IS A VARIABLE ANNUITY?
A variable annuity bases its benefits on the performance of underlying
investments. These investments may typically include stocks, bonds, and money
market instruments. The annuity described here is a variable annuity.
WHAT ARE THE RISKS IN OWNING A VARIABLE ANNUITY?
A variable annuity does not guarantee the performance of the underlying
investments. The performance can go up or down. It can even decrease the value
of money you've put in. You bear all of this risk. You could lose all or part of
the money you've put in.
HOW DOES THIS ANNUITY WORK?
We put your premium payments as you direct into one or more subaccounts of the
Account. In turn, we invest each subaccount's assets in corresponding portfolios
("Funds") of the following:
- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
- Domestic Money Market V.I. Fund
- MLIG VARIABLE INSURANCE TRUST
- Roszel/Lord Abbett Large Cap Value Portfolio
- Roszel/Levin Large Cap Value Portfolio
- Roszel/MLIM Relative Value Portfolio
- Roszel/Sound Large Cap Core Portfolio
- Roszel/INVESCO-NAM Large Cap Core Portfolio
- Roszel/Nicholas-Applegate Large Cap Growth Portfolio
- Roszel/Rittenhouse Large Cap Growth Portfolio
- Roszel/Seneca Large Cap Growth Portfolio
- Roszel/Valenzuela Mid Cap Value Portfolio
- Roszel/Seneca Mid Cap Growth Portfolio
- Roszel/NWQ Small Cap Value Portfolio
- Roszel/Neuberger Berman Small Cap Growth Portfolio
- Roszel/Lazard International Portfolio
- Roszel/Credit Suisse International Portfolio
- Roszel/Lord Abbett Government Securities Portfolio
- Roszel/MLIM Fixed-Income Portfolio
The value of your Contract at any point in time up to the annuity date is called
your contract value. Before the annuity date, you are generally free to direct
your contract value among the subaccounts as you wish. You may also withdraw all
or part of your contract value provided the remaining contract value after
withdrawal is at least $5,000. If you die before the annuity date, we pay a
death benefit to your beneficiary.
We've designed this annuity as a long-term investment. Any money you take out of
the Contract to the extent of gain is subject to tax, and if taken before age
59 1/2 may also be subject to a 10% federal penalty tax. FOR THESE REASONS, YOU
NEED TO CONSIDER YOUR CURRENT AND SHORT-TERM INCOME NEEDS CAREFULLY BEFORE YOU
DECIDE TO BUY THE CONTRACT.
WHAT DOES THIS ANNUITY COST?
THIS ANNUITY DOES NOT IMPOSE ANY SALES CHARGES -- ON EITHER PURCHASES OR
WITHDRAWALS. However, we impose a number of other charges, including an
asset-based insurance charge. We provide more details on this charge, as well as
a description of all other charges, later in the Prospectus.
------------------------
This Prospectus contains information about the Contract and the Account that you
should know before you invest. A Statement of Additional Information contains
more information about the Contract and the Account. We have filed the Statement
of Additional Information, dated July 1, 2002, with the Securities and Exchange
Commission. We incorporate this Statement of Additional Information by
reference. If you want to obtain this Statement of Additional Information,
simply call or write us at the phone number or address noted above. There is no
charge to obtain it. The Table of Contents for this Statement of Additional
Information is found on page 45 of this Prospectus.
The Securities and Exchange Commission maintains a web site that contains the
Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission. The address of the site is
http://www.sec.gov.
2
CURRENT PROSPECTUSES FOR THE MERRILL LYNCH VARIABLE SERIES FUNDS, INC. AND MLIG
VARIABLE INSURANCE TRUST MUST ACCOMPANY THIS PROSPECTUS. PLEASE READ THESE
DOCUMENTS CAREFULLY AND RETAIN THEM FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE CONTRACTS OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
3
TABLE OF CONTENTS
PAGE
----
DEFINITIONS................................................. 7
CAPSULE SUMMARY OF THE CONTRACT............................. 7
FEE TABLE................................................... 12
YIELDS AND TOTAL RETURNS.................................... 14
MERRILL LYNCH LIFE INSURANCE COMPANY........................ 16
THE ACCOUNT................................................. 16
Segregation of Account Assets............................. 16
Number of Subaccounts; Subaccount Investments............. 16
INVESTMENTS OF THE ACCOUNT.................................. 17
General Information and Investment Risks.................. 17
Merrill Lynch Variable Series Funds, Inc.................. 17
Domestic Money Market V.I. Fund........................ 17
MLIG Variable Insurance Trust............................. 18
Roszel/Lord Abbett Large Cap Value Portfolio........... 18
Roszel/Levin Large Cap Value Portfolio................. 18
Roszel/MLIM Relative Value Portfolio................... 18
Roszel/Sound Large Cap Core Portfolio.................. 18
Roszel/INVESCO-NAM Large Cap Core Portfolio............ 18
Roszel/Nicholas-Applegate Large Cap Growth Portfolio... 19
Roszel/Rittenhouse Large Cap Growth Portfolio.......... 19
Roszel/Seneca Large Cap Growth Portfolio............... 19
Roszel/Valenzuela Mid Cap Value Portfolio.............. 19
Roszel/Seneca Mid Cap Growth Portfolio................. 19
Roszel/NWQ Small Cap Value Portfolio................... 20
Roszel/Neuberger Berman Small Cap Growth Portfolio..... 20
Roszel/Lazard International Portfolio.................. 20
Roszel/Credit Suisse International Portfolio........... 20
Roszel/Lord Abbett Government Securities Portfolio..... 20
Roszel/MLIM Fixed-Income Portfolio..................... 20
MLIG Variable Insurance Trust Advisers.................... 21
Purchases and Redemptions of Fund Shares; Reinvestment.... 21
Material Conflicts, Substitution of Investments and
Changes to the Account................................. 21
CHARGES, DEDUCTIONS AND CREDITS............................. 22
Asset-Based Insurance Charge.............................. 22
Additional Death Benefit Charge........................... 22
Contract Fee.............................................. 23
Other Charges............................................. 23
Transfer Charges....................................... 23
Tax Charges............................................ 23
Fund Expenses.......................................... 23
Premium Taxes.......................................... 23
Contract Value Credit..................................... 24
FEATURES AND BENEFITS OF THE CONTRACT....................... 24
Ownership of The Contract................................. 24
Issuing the Contract...................................... 25
Issue Age.............................................. 25
Information We Need To Issue The Contract.............. 25
Ten Day Right to Review................................ 25
4
PAGE
----
Premiums.................................................. 25
Minimum and Maximum Premiums........................... 25
How to Make Payments................................... 26
Automatic Investment Feature........................... 26
Premium Investments.................................... 26
Accumulation Units........................................ 26
How Are My Contract Transactions Priced?.................. 26
How Do We Determine The Number of Units?.................. 27
ADDITIONAL PROVISIONS APPLICABLE TO ALL CONTRACTS........... 27
Death of Annuitant Prior to Annuity Date.................. 27
Transfers Among Subaccounts............................... 27
Dollar Cost Averaging Program............................. 28
What Is It?............................................ 28
Participating in the DCA Program....................... 28
Minimum Amounts........................................ 28
When Do We Make DCA Transfers?......................... 29
Rebalancing Program....................................... 29
Withdrawals and Surrenders................................ 29
When and How Withdrawals are Made...................... 29
Minimum Amounts........................................ 30
Systematic Withdrawal Program.......................... 30
Surrenders............................................. 30
Payments to Contract Owners............................... 30
Contract Changes.......................................... 31
Death Benefit............................................. 31
General................................................ 31
Death Benefit Options.................................. 31
Calculation of Death Benefit........................... 32
Maximum Anniversary Value GMDB......................... 32
Premiums Compounded at 5% GMDB......................... 33
Estate Enhancer Benefit................................ 33
Return of Premium GMDB................................. 34
Spousal Continuation...................................... 34
Annuity Payments.......................................... 35
Annuity Options........................................... 35
How We Determine Present Value of Future Guaranteed
Annuity Payments...................................... 36
Payments of a Fixed Amount............................. 36
Payments for a Fixed Period............................ 36
Life Annuity........................................... 36
Life Annuity With Payments Guaranteed for 5, 10, 15, or
20 Years.............................................. 36
Life Annuity With Guaranteed Return of Contract
Value................................................. 36
Joint and Survivor Life Annuity........................ 37
Joint and Survivor Life Annuity with Payments
Guaranteed for 5, 10, 15, or 20 Years................. 37
Individual Retirement Account Annuity.................. 37
Gender-Based Annuity Purchase Rates....................... 37
FEDERAL INCOME TAXES........................................ 37
Federal Income Taxes...................................... 37
Tax Status of the Contract................................ 38
Diversification Requirements........................... 38
Owner Control.......................................... 38
Required Distributions................................. 38
5
PAGE
----
Taxation of Annuities..................................... 38
In General............................................. 38
Withdrawals and Surrenders............................. 39
Annuity Payments....................................... 39
Taxation of Death Benefit Proceeds..................... 39
Penalty Tax on Some Withdrawals........................... 39
Transfers, Assignments, or Exchanges of a Contract........ 40
Withholding............................................... 40
Multiple Contracts........................................ 40
Possible Changes In Taxation.............................. 40
Possible Charge For Our Taxes............................. 40
Foreign Tax Credits....................................... 40
Individual Retirement Annuities........................... 40
Traditional IRAs....................................... 40
Roth IRAs.............................................. 41
Other Tax Issues For IRAs and Roth IRAs................ 41
Tax Sheltered Annuities................................... 41
OTHER INFORMATION........................................... 42
Notices and Elections..................................... 42
Voting Rights............................................. 42
Reports to Contract Owners................................ 42
Selling the Contract...................................... 43
State Regulation.......................................... 43
Legal Proceedings......................................... 44
Experts................................................... 44
Legal Matters............................................. 44
Registration Statements................................... 44
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION............................................... 45
APPENDIX A Maximum Anniversary Value Example................ A-1
APPENDIX B Premiums Compounded at 5% Example................ B-1
APPENDIX C Estate Enhancer Benefit Example.................. C-1
6
DEFINITIONS
accumulation unit: A unit of measure used to compute the value of your interest
in a subaccount prior to the annuity date.
annuitant: Annuity payments may depend upon the continuation of a person's life.
That person is called the annuitant.
annuity date: The date on which annuity payments begin.
attained age: The age of a person on the contract date plus the number of full
contract years since the contract date.
beneficiary(s): The person(s) designated by you to receive payment upon the
death of an owner prior to the annuity date.
contract anniversary: The yearly anniversary of the contract date.
contract date: The effective date of the Contract. This is usually the business
day we receive your initial premium at our Service Center.
contract value: The value of your interest in the Account.
contract year: The period from the contract date to the first contract
anniversary, and thereafter, the period from one contract anniversary to the
next contract anniversary.
Individual Retirement Account or Annuity ("IRA"): A retirement arrangement
meeting the requirements of Section 408 or 408A of the Internal Revenue Code
("IRC").
net investment factor: An index used to measure the investment performance of a
subaccount from one valuation period to the next.
nonqualified contract: A Contract issued in connection with a retirement
arrangement other than a qualified arrangement described in the IRC.
qualified contract: A Contract issued in connection with a retirement
arrangement described under Section 401, 403(b), 408, or 408A of the IRC.
tax sheltered annuity: A Contract issued in connection with a retirement
arrangement that receives favorable tax status under Section 403(b) of the IRC.
valuation period: The interval from one determination of the net asset value of
a subaccount to the next. Net asset values are determined as of the close of
business on each day the New York Stock Exchange is open.
CAPSULE SUMMARY OF THE CONTRACT
This capsule summary provides a brief overview of the Contract. More detailed
information about the Contract can be found in the sections of this Prospectus
that follow, all of which should be read in their entirety.
Contracts issued in your state may provide different features and benefits from
those described in this Prospectus. This Prospectus provides a general
description of the Contracts. Your actual Contract and any endorsements are the
controlling documents. If you would like to review a copy of the Contract or any
endorsements, contact our Service Center.
The Contract is available as a nonqualified contract or tax sheltered annuity or
may be issued as an IRA or purchased through an established IRA or Roth IRA
custodial account with Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"). Federal law limits maximum annual contributions to IRAs and Roth
IRAs. Transfer amounts from tax sheltered annuity plans that are not subject to
the Employee Retirement Income Security Act of 1974, as amended, will be
accepted as premium payments, as
7
permitted by law. Other premium payments will not be accepted under a Contract
used as a tax sheltered annuity.
The tax advantages typically provided by a variable annuity are already
available with tax-qualified plans, including IRAs and Roth IRAs. You should
carefully consider the advantages and disadvantages of owning a variable annuity
in a tax-qualified plan, as well as the costs and benefits of the Contract (such
as the annuity income benefits), before you purchase the Contract in a
tax-qualified plan.
We offer other variable annuity contracts that have different death benefits,
contract features, fund selections, and optional programs. These other contracts
also have different charges that would affect your subaccount performance and
contract values. To obtain more information about these other contracts, contact
our Service Center or your Financial Advisor.
It may not be to your advantage to own multiple contracts issued by us or an
affiliate because only contract value under this Contract is eligible to receive
Contract Value Credits if the contract value is $250,000 or greater (see
"Contract Value Credit").
For information concerning compensation paid for the sale of Contracts, see
"Selling the Contract."
PREMIUMS
Generally, before the annuity date you can pay premiums as often as you like.
The minimum initial premium is $75,000. Subsequent premiums generally must be
$50 or more. The maximum premium that will be accepted without Company approval
is $1,000,000. Under an automatic investment feature, you can make subsequent
premium payments systematically from your Merrill Lynch brokerage account. For
more information, see "Automatic Investment Feature".
THE ACCOUNT
As you direct, we will put premiums into the subaccounts corresponding to the
Funds in which we invest your contract value. For the first 14 days following
the contract date, we put all premiums into the Domestic Money Market V.I.
Subaccount. After the 14 days, we'll put the money into the subaccounts you've
selected. In Pennsylvania, however, we won't wait 14 days. Instead, we'll invest
your premium immediately in the subaccounts you've selected. Currently, you may
allocate premiums or contract value among the available subaccounts. Generally,
within certain limits you may transfer contract value periodically among
subaccounts.
8
THE FUNDS AVAILABLE FOR INVESTMENT
- FUNDS OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
- Domestic Money Market V.I. Fund
- FUNDS OF MLIG VARIABLE INSURANCE TRUST
- Roszel/Lord Abbett Large Cap Value Portfolio
- Roszel/Levin Large Cap Value Portfolio
- Roszel/MLIM Relative Value Portfolio
- Roszel/Sound Large Cap Core Portfolio
- Roszel/INVESCO-NAM Large Cap Core Portfolio
- Roszel/Nicholas-Applegate Large Cap Growth Portfolio
- Roszel/Rittenhouse Large Cap Growth Portfolio
- Roszel/Seneca Large Cap Growth Portfolio
- Roszel/Valenzuela Mid Cap Value Portfolio
- Roszel/Seneca Mid Cap Growth Portfolio
- Roszel/NWQ Small Cap Value Portfolio
- Roszel/Neuberger Berman Small Cap Growth Portfolio
- Roszel/Lazard International Portfolio
- Roszel/Credit Suisse International Portfolio
- Roszel/Lord Abbett Government Securities Portfolio
- Roszel/MLIM Fixed-Income Portfolio
If you want detailed information about the investment objectives of the Funds,
see "Investments of the Account" and the prospectuses for the Funds.
FEES, CHARGES AND CREDITS
ASSET-BASED INSURANCE CHARGE
We currently impose an asset-based insurance charge of 1.85% annually to cover
certain risks. It will never exceed 1.85% annually.
The asset-based insurance charge compensates us for:
- costs associated with the establishment, administration, and distribution
of the Contract;
- mortality risks we assume for the annuity payment and death benefit
guarantees made under the Contract; and
- expense risks we assume to cover Contract maintenance expenses.
We deduct the asset-based insurance charge daily from the net asset value of the
subaccounts. This charge ends on the annuity date.
ADDITIONAL DEATH BENEFIT CHARGE
If the Estate Enhancer death benefit is available to you and you choose to
combine it with either the Maximum Anniversary Value or Premiums Compounded at
5% guaranteed minimum death benefits (see "Death Benefit Options"), you will pay
an additional annual charge. This charge equals 0.25% of the average of your
contract values as of the end of each of the prior four contract quarters. A pro
rata amount of this charge is collected upon termination of the rider or the
Contract. We won't deduct this charge after the annuity date.
CONTRACT FEE
We impose a $50 contract fee at the end of each contract year and upon a full
withdrawal to reimburse us for expenses related to maintenance of the Contract
only if the greater of contract value, or premiums less withdrawals, is less
than $75,000. Accordingly, if your withdrawals have not decreased your
investment in the Contract below $75,000, we will not impose this annual fee. We
may also waive this fee in certain circumstances where you own more than three
Contracts. This fee ends after the annuity date.
9
PREMIUM TAXES
On the annuity date, we deduct a charge for any premium taxes imposed by a state
or local government. Premium tax rates vary from jurisdiction to jurisdiction.
They currently range from 0% to 5%. In some jurisdictions, we deduct a charge
for premium taxes from any withdrawal, surrender, or death benefit payment.
FUND EXPENSES
You will bear the costs of advisory fees and operating expenses deducted from
Fund assets.
CONTRACT VALUE CREDIT
If on the last business day of each month and upon termination of the Contract
your contract value is $250,000 or greater, we determine the amount of your
Contract Value Credit. We will add the sum of the Contract Value Credits
determined for each month within a calendar quarter (and termination period) to
your contract value on the last business day of each calendar quarter (and upon
termination of the Contract). The amount of Contract Value Credits, how they are
determined, and the circumstances under which they may be credited are described
under "Contract Value Credit".
You can find detailed information about all fees and charges imposed on the
Contract under "Charges, Deductions and Credits".
TRANSFERS AMONG SUBACCOUNTS
Before the annuity date, you may transfer all or part of your contract value
among the subaccounts up to twelve times per contract year without charge. You
may make more than twelve transfers among available subaccounts, but we may
charge $25 per extra transfer. (See "Transfers".)
Two specialized transfer programs are available under the Contract. You cannot
use more than one such program at a time.
- We offer a Dollar Cost Averaging Program where money you've put in a
designated subaccount is systematically transferred monthly into other
subaccounts you select without charge. The program may allow you to take
advantage of fluctuations in Fund share prices over time. (See "Dollar
Cost Averaging Program".) (There is no guarantee that Dollar Cost
Averaging will result in lower average prices or protect against market
loss.)
- You may choose to participate in a Rebalancing Program where we
automatically reallocate your contract value quarterly, semi-annually, or
annually in each calendar year in order to maintain a particular
percentage allocation among the subaccounts that you select. (See
"Rebalancing Program".)
WITHDRAWALS
You can withdraw money from the Contract at any time during the contract year.
Additionally, under a Systematic Withdrawal Program, you may have automatic
withdrawals of a specified dollar amount made monthly, quarterly, semi-annually,
or annually. For more information, see "Systematic Withdrawal Program".
A withdrawal may have adverse tax consequences, including the imposition of a
penalty tax on withdrawals prior to age 59 1/2. Withdrawals from tax sheltered
annuities are restricted (see "Federal Income Taxes").
DEATH BENEFIT
Regardless of investment performance, this Contract provides a guaranteed
minimum death benefit ("GMDB") if you die before the annuity date.
10
The death benefit equals the greater of the applicable GMDB or the contract
value. Any Estate Enhancer benefit is added to the death benefit.
At issue you must irrevocably choose one of the following three death benefit
options:
(1) Maximum Anniversary Value GMDB,
(2) Premiums Compounded at 5% GMDB (not available in Washington), or
(3) Estate Enhancer benefit with Return of Premium GMDB (not available in
Illinois, Minnesota, or Washington; on qualified contracts; or if the
contract owner, or the annuitant if the contract owner is a non-natural
person, is age 76 or older).
For an additional annual charge, you can elect to add the Estate Enhancer
benefit to either the Maximum Anniversary Value GMDB or the Premiums Compounded
at 5% GMDB.
The Maximum Anniversary Value GMDB equals the greater of premiums less
"adjusted" withdrawals or the Maximum Anniversary Value. The Maximum Anniversary
Value equals the greatest anniversary value for the Contract. An anniversary
value is calculated through the earlier of the owner's attained age 80 or date
of death.
The Premiums Compounded at 5% GMDB equals premiums paid less "adjusted"
withdrawals where both receive interest compounded daily to yield 5% annually.
Interest compounds until the earliest of the contract owner's attained age 80,
the last day of the twentieth contract year or the date of death.
The Estate Enhancer benefit pays, on the death of the owner, a benefit that
provides proceeds that may be used to defray some or all of the expenses
attributable to death benefit proceeds paid under the contract. The Estate
Enhancer provides coverage in addition to the Contract's GMDB. Election of the
Estate Enhancer benefit is subject to our approval in certain circumstances.
You can find more detailed information about the death benefit options, the
limitations that apply, and how they are calculated under "Death Benefit".
The payment of a death benefit may have tax consequences (see "Federal Income
Taxes").
ANNUITY PAYMENTS
Annuity payments begin on the annuity date, and payments will continue according
to the annuity option selected. You can select an annuity date but that date
cannot be earlier than the first Contract Anniversary nor later than the first
day of the month following the annuitant's 95th birthday. If you do not select
an annuity date, the annuity date for non-qualified Contracts is the first day
of the month following the annuitant's 95th birthday. The annuity date for IRA
or tax sheltered annuity Contracts is generally when the owner/annuitant reaches
age 70 1/2. You may change the scheduled annuity date at any time before annuity
payments begin.
Details about the annuity options available under the Contract can be found
under "Annuity Options".
Annuity payments may have tax consequences (see "Federal Income Taxes").
TEN DAY REVIEW
When you receive the Contract, read it carefully to make sure it's what you
want. Generally, within 10 days after you receive the Contract, you may return
it for a refund. Some states allow a longer period of time to return the
Contract. To get a refund, return the Contract to the Service Center or to the
Financial Advisor who sold it. We will then refund the greater of all premiums
paid into the Contract or the contract value as of the date you return the
Contract. For contracts issued in Pennsylvania, we'll refund the contract value
as of the date you return the Contract.
11
REPLACEMENT OF CONTRACTS
Generally, it is not advisable to purchase a Contract as a replacement for an
existing annuity contract. You should replace an existing contract only when you
determine that the Contract is better for you. You may have to pay a surrender
charge on your existing contract. Before you buy a Contract, ask your Financial
Advisor if purchasing a Contract could be advantageous, given the Contract's
features, benefits, and charges.
You should talk to your tax advisor to make sure that this purchase will qualify
as a tax-free exchange. If you surrender your existing contract for cash and
then buy the Contract, you may have to pay federal income taxes, including
possible penalty taxes, on the surrender. Also, because we will not issue the
Contract until we have received the initial premium from your existing insurance
company, the issuance of the Contract may be delayed.
FEE TABLE
A... Contract Owner Transaction Expenses
1. Sales Load Imposed on Premium............................ None
2. Contingent Deferred Sales Charge......................... None
3. Transfer Fee............................................. $25
The first 12 transfers among subaccounts in a contract
year are free. We currently do not, but may in the
future, charge a $25 fee on all subsequent transfers.
The Fee Table and Examples do not include charges to
contract owners for premium taxes. Premium taxes may be
applicable. Refer to the "Premium Taxes" section in this
Prospectus for further details.
B. Annual Contract Fee......................................... $50
The Contract Fee will be assessed at the end of each
contract year and upon a full withdrawal only if the greater
of contract value, or premiums less withdrawals, is less
than $75,000.
C. Separate Account Annual Expenses (as a percentage of
contract value)
Current and Maximum Asset-Based Insurance Charge+........... 1.85%
D. Additional Death Benefit Charge............................. 0.25%
An additional annual charge will be assessed when the Estate
Enhancer benefit is combined with either the Maximum
Anniversary Value GMDB or Premiums Compounded at 5% GMDB.
The charge will be assessed at the end of each contract year
based on the average of your contract values as of the end
of each of the prior four contract quarters. We also impose
a pro rata amount of this charge upon surrender,
annuitization, death, or termination of the rider.
---------------
+ If your contract value is $250,000 or greater on specified dates, a Contract
Value Credit will be added to your contract value that effectively reduces
the rate of this charge (see "Contract Value Credit"). This potential
reduction is not reflected in the Fee Table.
12
E. Fund Expenses for the Year Ended December 31, 2001 (see
"Notes to Fee Table") (as a percentage of each Fund's
average net assets)++
MERRILL LYNCH
VARIABLE
SERIES FUNDS, INC.
(CLASS A SHARES) MLIG VARIABLE INSURANCE TRUST(a)
------------------ -----------------------------------------------------------
ROSZEL/LORD ROSZEL/LEVIN ROSZEL/SOUND
DOMESTIC ABBETT LARGE LARGE CAP ROSZEL/MLIM LARGE CAP
MONEY CAP VALUE VALUE RELATIVE VALUE CORE
ANNUAL EXPENSES MARKET V.I. FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------- ------------------ ------------ ------------ -------------- ------------
Investment Advisory Fees.......... 0.50% 0.80% 0.80% 0.80% 0.80%
Other Expenses.................... 0.07% 0.97% 0.97% 0.97% 0.97%
----- ----- ----- ----- -----
Total Annual Operating Expenses... 0.57% 1.77% 1.77% 1.77% 1.77%
Expense
Reimbursements.................... 0.00% 0.67% 0.67% 0.67% 0.67%
----- ----- ----- ----- -----
Net Expenses...................... 0.57% 1.10% 1.10% 1.10% 1.10%
MLIG VARIABLE INSURANCE TRUST(a)
---------------------------------------------------------------------------------------------
ROSZEL/
ROSZEL/ NICHOLAS- ROSZEL/ ROSZEL/
INVESCO- APPLEGATE RITTENHOUSE ROSZEL/SENECA VALENZUELA ROSZEL/SENECA ROSZEL/NWQ
NAM LARGE LARGE CAP LARGE CAP LARGE CAP MID CAP MID CAP SMALL CAP
CAP CORE GROWTH GROWTH GROWTH VALUE GROWTH VALUE
ANNUAL EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------- --------- ----------- ------------- ---------- ------------- ----------
Investment Advisory Fees.......... 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.85%
Other Expenses.................... 0.97% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97%
----- ----- ----- ----- ----- ----- -----
Total Annual Operating Expenses... 1.77% 1.77% 1.77% 1.77% 1.77% 1.77% 1.82%
Expense
Reimbursements.................... 0.67% 0.67% 0.67% 0.67% 0.67% 0.67% 0.67%
----- ----- ----- ----- ----- ----- -----
Net Expenses...................... 1.10% 1.10% 1.10% 1.10% 1.10% 1.10% 1.15%
MLIG VARIABLE INSURANCE TRUST(a)
----------------------------------------------------------------------
ROSZEL/
NEUBERGER ROSZEL/LORD
BERMAN ROSZEL/CREDIT ABBETT
SMALL CAP ROSZEL/LAZARD SUISSE GOVERNMENT ROSZEL/MLIM
GROWTH INTERNATIONAL INTERNATIONAL SECURITIES FIXED-INCOME
ANNUAL EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------- --------- ------------- ------------- ----------- ------------
Investment Advisory Fees.......... 0.95% 0.85% 0.85% 0.65% 0.70%
Other Expenses.................... 0.97% 0.98% 0.98% 0.97% 0.97%
----- ----- ----- ----- -----
Total Annual Operating Expenses... 1.92% 1.83% 1.83% 1.62% 1.67%
Expense
Reimbursements.................... 0.67% 0.68% 0.68% 0.67% 0.67%
----- ----- ----- ----- -----
Net Expenses...................... 1.25% 1.15% 1.15% 0.95% 1.00%
---------------
++ Expenses for all of the available Funds, except for the Domestic Money
Market V.I. Fund, are estimated.
EXAMPLES OF CHARGES
If you surrender or annuitize your Contract at the end of the applicable time
period, you would pay the following cumulative expenses on each $1,000 invested,
assuming 5% annual return on assets:
1 YEAR 3 YEARS
------ -------
SUBACCOUNT INVESTING IN:
ML Domestic Money Market V.I. Fund.......................... $28 $ 85
Roszel/Lord Abbett Large Cap Value Portfolio................ 33 101
Roszel/Levin Large Cap Value Portfolio...................... 33 101
Roszel/MLIM Relative Value Portfolio........................ 33 101
Roszel/Sound Large Cap Core Portfolio....................... 33 101
Roszel/INVESCO-NAM Large Cap Core Portfolio................. 33 101
Roszel/Nicholas-Applegate Large Cap Growth Portfolio........ 33 101
Roszel/Rittenhouse Large Cap Growth Portfolio............... 33 101
13
1 YEAR 3 YEARS
------ -------
Roszel/Seneca Large Cap Growth Portfolio.................... $33 $101
Roszel/Valenzuela Mid Cap Value Portfolio................... 33 101
Roszel/Seneca Mid Cap Growth Portfolio...................... 33 101
Roszel/NWQ Small Cap Value Portfolio........................ 34 102
Roszel/Neuberger Berman Small Cap Growth Portfolio.......... 35 105
Roszel/Lazard International Portfolio....................... 34 102
Roszel/Credit Suisse International Portfolio................ 34 102
Roszel/Lord Abbett Government Securities Portfolio.......... 32 96
Roszel/MLIM Fixed-Income Portfolio.......................... 32 98
---------------
Because there is no contingent deferred sales charge, you would pay the same
expenses whether you surrender your Contract at the end of the applicable time
period or not, based on the same assumptions.
------------------------
The preceding Fee Table and Examples help you understand the costs and expenses
you will bear, directly or indirectly. The Fee Table and Examples include
expenses and charges of the Account as well as the Funds. The Examples do not
reflect the $50 contract fee because, based on our estimates of average contract
size and withdrawals, its effect on the examples shown would be negligible. The
examples assume that the Estate Enhancer benefit is elected with either the
Maximum Anniversary Value GMDB or Premiums Compounded at 5% GMDB and reflect the
annual charge of 0.25% of the average of your contract values as of the end of
each of the prior four contract quarters. Premium taxes may also be applicable.
See the CHARGES, DEDUCTIONS AND CREDITS section in this Prospectus and the Fund
prospectuses for a further discussion of fees and charges.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR ANNUAL RATES OF RETURN OF ANY FUND. ACTUAL EXPENSES AND ANNUAL RATES
OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR THE PURPOSE OF THE
EXAMPLES.
NOTES TO FEE TABLE
(a) Roszel Advisors, LLC and MLIG Variable Insurance Trust have entered into an
expense limitation agreement whereby Roszel Advisors agrees to reimburse
each Portfolio to the extent total operating expenses (excluding interest,
taxes, brokerage commissions, expenses in the form of fees paid to Trust
service providers by brokers in connection with directed brokerage
arrangements, other expenditures that are capitalized in accordance with
generally accepted accounting principles, and other extraordinary expenses
not incurred in the ordinary course of each Portfolio's business) exceed the
following limits: 0.95% for Roszel/Lord Abbett Government Securities
Portfolio; 1.00% for Roszel/ MLIM Fixed-Income Portfolio; 1.10% for
Roszel/Lord Abbett Large Cap Value Portfolio, Roszel/ Levin Large Cap Value
Portfolio, Roszel/MLIM Relative Value Portfolio, Roszel/Sound Large Cap Core
Portfolio, Roszel/INVESCO-NAM Large Cap Core Portfolio,
Roszel/Nicholas-Applegate Large Cap Growth Portfolio, Roszel/Rittenhouse
Large Cap Growth Portfolio, Roszel/Seneca Large Cap Growth Portfolio,
Roszel/Valenzuela Mid Cap Value Portfolio, and Roszel/Seneca Mid Cap Growth
Portfolio; 1.15% for Roszel/NWQ Small Cap Value Portfolio, Roszel/Lazard
International Portfolio, and Roszel/Credit Suisse International Portfolio;
and 1.25% for Roszel/Neuberger Berman Small Cap Growth Portfolio. Any such
reimbursement is subject to potential recoupment by Roszel Advisors within
three years.
YIELDS AND TOTAL RETURNS
From time to time, we may advertise yields, effective yields, and total returns
for the subaccounts. These figures are based on historical earnings and do not
indicate or project future performance. We may also advertise performance of the
subaccounts in comparison to certain performance rankings and indices. More
detailed information on the calculation of performance information, as well as
comparisons with unmanaged market indices, appears in the Statement of
Additional Information.
14
Effective yields and total returns for a subaccount are based on the investment
performance of the corresponding Fund. Fund expenses influence Fund performance.
The yield of the Domestic Money Market V.I. Subaccount refers to the annualized
income generated by an investment in the subaccount over a specified 7-day
period. The yield is calculated by assuming that the income generated for that
7-day period is generated each 7-day period over a 52-week period and is shown
as a percentage of the investment. The effective yield is calculated similarly
but, when annualized, the income earned by an investment is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield of a subaccount (besides the Domestic Money Market V.I. Subaccount)
refers to the annualized income generated by an investment in the subaccount
over a specified 30-day or one month period. The yield is calculated by assuming
the income generated by the investment during that 30-day or one-month period is
generated each period over 12 months and is shown as a percentage of the
investment.
The average annual total return of a subaccount refers to return quotations
assuming an investment has been held in each subaccount for 1, 5 and 10 years,
or for a shorter period, if applicable. The average annual total returns
represent the average compounded rates of return that would cause an initial
investment of $1,000 to equal the value of that investment at the end of each
period. These percentages exclude any deductions for premium taxes.
We may also advertise or present yield or total return performance information
computed on different bases, but this information will always be accompanied by
average annual total returns for the corresponding subaccounts. We may also
advertise total return performance information for the Funds. We may also
present total return performance information for a subaccount for periods before
the date the subaccount commenced operations. If we do, we'll base performance
of the corresponding Fund as if the subaccount existed for the same periods as
those indicated for the corresponding Fund, with a level of fees and charges
equal to those currently imposed under the Contracts. We may also present total
performance information for a hypothetical Contract assuming allocation of the
initial premium to more than one subaccount or assuming monthly transfers from
one subaccount to designated other subaccounts under a Dollar Cost Averaging
Program. We may also present total performance information for a hypothetical
Contract assuming participation in the Rebalancing Program. This information
will reflect the performance of the affected subaccounts for the duration of the
allocation under the hypothetical Contract. It will also reflect the deduction
of charges described above. This information may also be compared to various
indices.
Advertising and sales literature for the Contracts may also compare the
performance of the subaccounts and Funds to the performance of other variable
annuity issuers in general or to the performance of particular types of variable
annuities investing in mutual funds, with investment objectives similar to each
of the Funds corresponding to the subaccounts.
Performance information may also be based on rankings by services which monitor
and rank the performance of variable annuity issuers in each of the major
categories of investment objectives on an industry-wide basis. Ranking services
we may use as sources of performance comparison are Lipper, VARDS,
CDA/Weisenberger, Morningstar, MICROPAL, and Investment Company Data, Inc.
Advertising and sales literature for the Contracts may also compare the
performance of the subaccounts to the Dow Jones Indices, the Merrill Lynch U.S.
Government Master Bond Index, the Merrill Lynch U.S. Domestic Master Bond Index,
the Morgan Stanley EAFE(R) Index, the Russell 1000(R) Index, the Russell 1000(R)
Growth Index, the Russell 1000(R) Value Index, the Russell 2000(R) Growth Index,
the Russell 2000(R) Value Index, the Russell Midcap(R) Index, the Russell
Midcap(R) Growth Index, the Russell Midcap(R) Value Index, and the Standard &
Poor's Index of 500 Common Stocks, all widely used measures of stock market
performance. These unmanaged indices assume the reinvestment of dividends, but
do not reflect any deduction for the expense of operating or managing an
investment portfolio. Other sources of performance comparison that we may use
are Chase Investment Performance
15
Digest, Money, Forbes, Fortune, Business Week, Financial Services Weekly,
Kiplinger Personal Finance, Wall Street Journal, USA Today, Barrons, U.S. News &
World Report, Strategic Insight, Donaghues, Investors Business Daily, and
Ibbotson Associates.
Advertising and sales literature for the Contracts may also contain information
on the effect of tax deferred compounding on subaccount investment returns, or
returns in general. The tax deferral may be illustrated by graphs and charts and
may include a comparison at various points in time of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a currently taxable basis.
MERRILL LYNCH LIFE INSURANCE COMPANY
We are a stock life insurance company organized under the laws of the State of
Washington on January 27, 1986. We changed our corporate location to Arkansas on
August 31, 1991. We are an indirect wholly owned subsidiary of Merrill Lynch &
Co., Inc., a corporation whose common stock is traded on the New York Stock
Exchange.
Our financial statements can be found in the Statement of Additional
Information. You should consider them only in the context of our ability to meet
any Contract obligation.
THE ACCOUNT
The Merrill Lynch Life Variable Annuity Separate Account C (the "Account")
offers through its subaccounts a variety of investment options. Each option has
a different investment objective.
We established the Account on November 16, 2001. It is governed by Arkansas law,
our state of domicile. The Account is registered with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940. The Account meets the definition of a separate account under the
federal securities laws. The Account's assets are segregated from all of our
other assets.
SEGREGATION OF ACCOUNT ASSETS
Obligations to contract owners and beneficiaries that arise under the Contract
are our obligations. We own all of the assets in the Account. The Account's
income, gains, and losses, whether or not realized, derived from Account assets
are credited to or charged against the Account without regard to our other
income, gains or losses. The assets in each Account will always be at least
equal to the reserves and other liabilities of the Account. If the Account's
assets exceed the required reserves and other Contract liabilities, we may
transfer the excess to our general account. Under Arkansas insurance law the
assets in the Account, to the extent of its reserves and liabilities, may not be
charged with liabilities arising out of any other business we conduct nor may
the assets of the Account be charged with any liabilities of other separate
accounts.
NUMBER OF SUBACCOUNTS; SUBACCOUNT INVESTMENTS
There are 17 subaccounts currently available through the Account. All
subaccounts invest in a corresponding portfolio of the Merrill Lynch Variable
Series Funds, Inc. or the MLIG Variable Insurance Trust. Additional subaccounts
may be added or closed in the future.
Although the investment objectives and policies of certain Funds are similar to
the investment objectives and policies of other portfolios that may be managed
or sponsored by the same investment adviser, manager, or sponsor, nevertheless,
we do not represent or assure that the investment results will be comparable to
any other portfolio, even where the investment adviser or manager is the same.
Differences in portfolio size, actual investments held, fund expenses, and other
factors all contribute to differences in fund performance. For all of these
reasons, you should expect investment results to differ. In particular, certain
Funds available only through the Contract may have names similar to funds not
available through the Contract. The performance of a fund not available through
the Contract does not indicate performance of any similarly named Fund available
through the Contract.
16
INVESTMENTS OF THE ACCOUNT
GENERAL INFORMATION AND INVESTMENT RISKS
Information about investment objectives, management, policies, restrictions,
expenses, risks, and all other aspects of fund operations can be found in the
Funds' prospectuses and Statements of Additional Information. Read these
carefully before investing. Fund shares are currently sold to our separate
accounts as well as separate accounts of ML Life Insurance Company of New York
(an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.) to fund
benefits under certain variable annuity and variable life insurance contracts.
Shares of these Funds may be offered in the future to certain pension or
retirement plans.
The investment adviser or subadviser of a Fund (or their affiliates) may pay
compensation to us or our affiliates, which may be significant, in connection
with administration or other services provided with respect to the Funds and
their availability through the Contracts. The amount of this compensation is
based upon a percentage of the assets of the Fund attributable to the Contracts
and other contracts that we or our affiliates issue. These percentages differ,
and some advisers or subadvisers (or their affiliates) may pay more than others.
Generally, you should consider the Funds as long-term investments and vehicles
for diversification, but not as a balanced investment program. Many of these
Funds may not be appropriate as the exclusive investment to fund a Contract for
all contract owners. The Fund prospectuses also describe certain additional
risks, including investing on an international basis or in foreign securities
and investing in lower rated or unrated fixed income securities. There is no
guarantee that any Fund will be able to meet its investment objectives. Meeting
these objectives depends upon future economic conditions and upon how well Fund
management anticipates changes in economic conditions.
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
The Merrill Lynch Variable Series Funds, Inc. ("Variable Series Funds") is
registered with the Securities and Exchange Commission as an open-end management
investment company. It currently offers the Account Class A shares of the
Domestic Money Market V.I. Fund.
Merrill Lynch Investment Managers, L.P. ("MLIM") is the investment adviser to
the Domestic Money Market V.I. Fund. MLIM is also the subadviser to the
Roszel/MLIM Relative Value and Roszel/MLIM Fixed-Income Portfolios of MLIG
Variable Insurance Trust. MLIM, together with its affiliates, Fund Asset
Management, L.P., Merrill Lynch Asset Management U.K., Ltd., and Merrill Lynch
Investment Managers International Ltd., (all of which may operate under the
name, "Mercury Advisors"), is a worldwide mutual fund leader, and had a total of
$518 billion in investment company and other portfolio assets under management
as of March 31, 2002. It is registered as an investment adviser under the
Investment Advisers Act of 1940. MLIM is an indirect subsidiary of Merrill Lynch
& Co., Inc. MLIM's principal business address is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536. As the investment adviser, it is paid fees by the
Fund for its services. MLIM and Merrill Lynch Life Agency, Inc. have entered
into a Reimbursement Agreement that limits the operating expenses paid by the
Domestic Money Market V.I. Fund in a given year to 1.25% of its average net
assets. A summary of the investment objective and strategy for the Domestic
Money Market V.I. Fund is set forth below.
DOMESTIC MONEY MARKET V.I. FUND. This Fund seeks to preserve capital, maintain
liquidity, and achieve the highest possible current income consistent with the
foregoing objectives by investing in short-term domestic money market
securities. Although the Domestic Money Market V.I. Fund seeks to preserve
capital, it is possible to lose money by investing in this Fund. During extended
periods of low interest rates, the yields of the Domestic Money Market V.I.
Subaccount also may be extremely low and possibly negative.
17
MLIG VARIABLE INSURANCE TRUST
MLIG Variable Insurance Trust ("MLIG Trust"), a Delaware business trust, is
registered with the Securities and Exchange Commission as an open-end management
investment company. It currently offers the Account sixteen of its separate
investment portfolios ("Portfolios").
Roszel Advisors, LLC ("Roszel Advisors") is the investment manager of MLIG Trust
and each of the Portfolios. As investment manager, Roszel Advisors is
responsible for overall management of the Trust and retains subadvisers
("advisers") to manage the assets of each Portfolio according to its investment
objective and strategies. It is registered as an investment adviser under the
Investment Advisers Act of 1940. Roszel Advisors is an indirect subsidiary of
Merrill Lynch & Co., Inc. Roszel Advisors' principal business address is 7
Roszel Road, Princeton, New Jersey 08540. As the investment manager, it is paid
fees by the Funds for its services. Roszel Advisors pays the subadvisory fees,
not the Fund. A summary of the investment objective and strategy for each Fund
is set forth below.
ROSZEL/LORD ABBETT LARGE CAP VALUE PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in large capitalization equity securities that the adviser
believes are undervalued by the market. The adviser's approach is to invest in
stocks and sectors that it believes the market systematically misprices. The
adviser emphasizes quantitative analysis of companies and seeks to identify one
or more catalysts that are likely to increase a company's earnings over the next
several years. On the quantitative side, normalized earnings are a key factor in
assessing a security's potential future value. The adviser uses macroeconomic
and benchmark factors to manage risk and maximize risk-adjusted return for the
Portfolio.
ROSZEL/LEVIN LARGE CAP VALUE PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in large capitalization equity securities that the adviser believes
are undervalued by the market. The adviser emphasizes fundamental analysis of
companies and often acquires securities of two companies that are similar in
many respects except that the adviser expects them to respond in different ways
to particular industry or business changes or events. The adviser seeks to
minimize performance volatility vis-a-vis the Russell 1000 Index, the
Portfolio's performance benchmark. In this regard, avoiding "downside" risk is
often as important to the adviser as pursuing "upside" potential.
ROSZEL/MLIM RELATIVE VALUE PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in large capitalization equity securities that the adviser believes
are undervalued by the market. The adviser uses a proprietary multi-factor
screen to identify undervalued securities. Securities must meet or exceed a
minimum qualifying score in order to be considered for further analysis. The
adviser generally stays within sector limits to avoid overweighting or
underweighting any sector by more than 50% in comparison with the S&P 500 Index.
ROSZEL/SOUND LARGE CAP CORE PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in large capitalization equity securities that the adviser believes
have a potential to earn a high return on capital and/or are undervalued by the
market. The adviser uses a disciplined sector weighting approach by which it
divides the securities in the S&P 500 Index, the Portfolio's performance
benchmark, into ten sectors and adjusts the weightings of investments in these
sectors such that they do not deviate more than 5% from the benchmark's
weightings. The adviser then seeks certain securities within a sector that it
believes offer better than average growth and earnings prospects. Within this 5%
tolerance, the adviser may overweight or underweight investments in various
sectors when it believes the sectors may outperform or underperform the
benchmark.
ROSZEL/INVESCO-NAM LARGE CAP CORE PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in large capitalization equity securities that the adviser
believes have a potential to earn a high return on capital and/or are
undervalued by the market. The adviser's approach is to blend some
characteristics of value investing style with those of a
18
growth investing style in seeking stocks with market capitalizations greater
than $2 billion. Under normal market conditions, "value" stocks and "growth"
stocks each make up between 35% and 65% of the Portfolio's total assets. Using a
quantitative approach, the adviser constructs the Portfolio using stocks having
one or more of the following three characteristics: low share price-to-earnings
ratios, high yields, or sustained high rates of earnings growth. Investments in
each category comprise between 20% and 50% of the Portfolio.
ROSZEL/NICHOLAS-APPLEGATE LARGE CAP GROWTH PORTFOLIO. The Portfolio seeks
long-term capital appreciation. The Portfolio pursues its investment objective
by investing primarily in large capitalization equity securities of companies
that the adviser believes have a potential for high earnings growth rates.
Generally such securities are those of well-established issuers with strong
business franchises and favorable long-term growth prospects. The adviser's
approach is to find companies that are experiencing positive change that is
timely and sustainable. Following a comprehensive risk evaluation, the adviser
constructs an investment portfolio from among the securities of such companies.
ROSZEL/RITTENHOUSE LARGE CAP GROWTH PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in large capitalization equity securities of companies that
the adviser believes have a potential for competitive earnings growth rates.
Generally such securities are those of well-established companies with strong
business franchises and favorable long-term growth prospects. The adviser's
approach is to select companies with a minimum of $5 billion market
capitalization. The adviser focuses on the quality of a company's earnings and
seeks those with historically consistent earnings and sustainable long-term
growth rates. The adviser's goal is to provide above-average risk-adjusted
returns as compared with its benchmarks and avoiding "downside" risk is often as
important to it as is pursuing "upside" potential.
ROSZEL/SENECA LARGE CAP GROWTH PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in large capitalization equity securities of companies that the
adviser believes have a potential for high earnings growth rates. Generally such
securities are those of well-established issuers with strong business franchises
and favorable long-term growth prospects. The adviser's approach is to acquire a
balanced mix of companies with stable demonstrated long-term growth and
companies with expected acceleration in earnings growth. To identify companies
that may experience an acceleration of earnings growth, the adviser often looks
for those providing unanticipated increases in quarterly earnings and/or upward
revisions in future earnings estimates. The adviser also uses various
quantitative techniques to control risk. To limit portfolio volatility, no more
than 5% of the Portfolio's total assets is invested in the securities of any
single issuer. The Portfolio may include mid capitalization securities from time
to time and may invest in a wide variety of income-bearing securities.
ROSZEL/VALENZUELA MID CAP VALUE PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in mid capitalization equity securities that the adviser
believes are undervalued by the market. The adviser focuses on stock selection
and valuation using both quantitative and qualitative analysis. The adviser's
quantitative analysis uses financial data, mainly 3- to 5-year historical
quarterly ratio analysis. Normally, the adviser follows about 180 issuers of mid
capitalization securities using approximately 25 different financial ratios. The
adviser's qualitative analysis of companies includes interviewing a company's
management as well as its customers, competitors, and suppliers, about issues
raised by the adviser's quantitative analysis. From this, the adviser compiles a
purchase list with buy and sell target prices of about 100 stocks.
ROSZEL/SENECA MID CAP GROWTH PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in mid capitalization equity securities of companies that the adviser
believes have a potential for high and sustainable earnings growth rates. The
adviser's approach is to acquire a balanced mix of companies with stable
long-term growth and companies with expected acceleration in earnings growth. To
identify companies that may experience an acceleration of earnings growth, the
adviser often looks for those providing unanticipated increases in quarterly
earnings and/or upward revisions in future earnings estimates. The adviser also
uses various quantitative measures
19
to control risks. In addition to equity securities, the Portfolio also may
invest in a variety of income-bearing securities.
ROSZEL/NWQ SMALL CAP VALUE PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in small capitalization equity securities that the adviser believes
are undervalued by the market. The adviser uses a value investing style that
emphasizes qualitative factors over quantitative ones. Although the adviser uses
traditional quantitative methods such as cash flow analysis to identify
undervalued securities, it focuses on seeking stocks under temporary selling
pressure of those of special situation companies such as turnaround candidates
or companies expected to outperform their peers due to changes in the economic
cycle. The adviser also looks for companies with potential catalysts to unlock
or improve profitability. Typical catalysts are: new management, renewed
management focus, improving fundamentals, industry consolidation and company
restructuring. The adviser generally tries to maintain the Portfolio's dollar
weighted median capitalization at or near that of its benchmark, the Russell
2000 Value Index.
ROSZEL/NEUBERGER BERMAN SMALL CAP GROWTH PORTFOLIO. The Portfolio seeks
long-term capital appreciation. The Portfolio pursues its investment objective
by investing primarily in small capitalization equity securities of companies
that the adviser believes have a potential for high earnings growth rates. The
adviser uses a growth investing style looking for companies that are in the
developmental stage as well as better-established companies that appear poised
to grow because of new products, markets or management. Factors used in
identifying these companies include financial strength, a strong position
relative to competitors and a stock price that is reasonable in light of its
growth rate. The adviser identifies companies with projected annual earnings and
revenue growth rates of at least 15% over the next three years.
ROSZEL/LAZARD INTERNATIONAL PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in equity securities of foreign issuers that the adviser believes are
undervalued by the market. The adviser uses a relative value investing style to
seek financially productive securities that are undervalued relative to their
respective industries and peers based on their earnings, cash flow or asset
values. The adviser invests in securities of relatively large established
foreign issuers located in economically developed countries.
ROSZEL/CREDIT SUISSE INTERNATIONAL PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in equity securities of foreign issuers that the adviser
believes have a potential for strong earnings growth rates. The adviser uses a
style that combines favorable growth prospects with attractive valuations, or a
"growth at a reasonable price" strategy. The adviser invests in securities of a
wide variety of well established foreign issuers, including depository receipts.
ROSZEL/LORD ABBETT GOVERNMENT SECURITIES PORTFOLIO. The Portfolio seeks as high
a level of income as is consistent with investment in Government securities. The
Portfolio invests primarily in Government securities and generally maintains an
average portfolio duration of three to eight years. The Portfolio seeks to
maintain a relatively stable level of income and to limit share price
volatility. The adviser seeks to manage the duration of portfolio investments to
achieve an optimal balance of yield and corresponding interest rate risk.
Similarly, the adviser often seeks higher yields from investments in
mortgage-related Government securities when it can do so without taking on
excessive prepayment/extension risk. In this regard, mortgage-related Government
securities may make up a substantial portion of the Portfolio's assets.
ROSZEL/MLIM FIXED-INCOME PORTFOLIO. The Portfolio seeks as high a level of
total return as is consistent with investment in high-grade income-bearing
securities. The Portfolio invests primarily in high-grade income-bearing
securities and seeks to maintain total return through duration management and
sector rotation consistent with the adviser's outlook of future interest rate
changes. The Portfolio generally maintains an average portfolio duration of four
to six years. It generally maintains an average credit quality
20
of A or better. The Portfolio invests in a wide variety of income-bearing
securities including mortgage-backed securities.
MLIG VARIABLE INSURANCE TRUST ADVISERS
The following chart lists the adviser for each Portfolio in the MLIG Trust:
---------------------------------------------------------------------------------------------
PORTFOLIO ADVISER
---------------------------------------------------------------------------------------------
Roszel/Lord Abbett Large Cap Value Portfolio Lord, Abbett & Co.
---------------------------------------------------------------------------------------------
Roszel/Levin Large Cap Value Portfolio John A. Levin & Co., Inc.
---------------------------------------------------------------------------------------------
Roszel/MLIM Relative Value Portfolio Merrill Lynch Investment Managers, L.P.
---------------------------------------------------------------------------------------------
Roszel/Sound Large Cap Core Portfolio Sound Capital Partners
---------------------------------------------------------------------------------------------
Roszel/INVESCO-NAM Large Cap Core INVESCO-National Asset Management Group
Portfolio
---------------------------------------------------------------------------------------------
Roszel/Nicholas-Applegate Large Cap Growth Nicholas-Applegate Capital Management, LLC
Portfolio
---------------------------------------------------------------------------------------------
Roszel/Rittenhouse Large Cap Growth Portfolio Rittenhouse Financial Services, Inc.
---------------------------------------------------------------------------------------------
Roszel/Seneca Large Cap Growth Portfolio Seneca Capital Management LLC
---------------------------------------------------------------------------------------------
Roszel/Valenzuela Mid Cap Value Portfolio Valenzuela Capital Partners LLC
---------------------------------------------------------------------------------------------
Roszel/Seneca Mid Cap Growth Portfolio Seneca Capital Management LLC
---------------------------------------------------------------------------------------------
Roszel/NWQ Small Cap Value Portfolio NWQ Investment Management Company
---------------------------------------------------------------------------------------------
Roszel/Neuberger Berman Small Cap Growth Neuberger Berman Management, Inc.
Portfolio
---------------------------------------------------------------------------------------------
Roszel/Lazard International Portfolio Lazard Asset Management
---------------------------------------------------------------------------------------------
Roszel/Credit Suisse International Portfolio Credit Suisse Asset Management, LLC
---------------------------------------------------------------------------------------------
Roszel/Lord Abbett Government Securities Lord, Abbett & Co.
Portfolio
---------------------------------------------------------------------------------------------
Roszel/MLIM Fixed-Income Portfolio Merrill Lynch Investment Managers, L.P.
---------------------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS OF FUND SHARES; REINVESTMENT
The Account will purchase and redeem shares of the Funds at net asset value to
provide benefits under the Contract. Fund distributions to the Account are
automatically reinvested at net asset value in additional shares of the Funds.
MATERIAL CONFLICTS, SUBSTITUTION OF INVESTMENTS AND CHANGES TO THE ACCOUNT
It is conceivable that material conflicts could arise as a result of both
variable annuity and variable life insurance separate accounts investing in the
Funds. Although no material conflicts are foreseen, the participating insurance
companies will monitor events in order to identify any material conflicts
between variable annuity and variable life insurance contract owners to
determine what action, if any, should be taken. Material conflicts could result
from such things as (1) changes in state insurance law, (2) changes in federal
income tax law or (3) differences between voting instructions given by variable
annuity and variable life insurance contract owners. If a conflict occurs, we
may be required to eliminate one or more subaccounts of the Account or
substitute a new subaccount. In responding to any conflict, we will take the
action we believe necessary to protect our contract owners.
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We may substitute a different investment option for any of the current Funds. A
substitution may become necessary if, in our judgment, a portfolio no longer
suits the purposes of the Contracts or for any other reason in our sole
discretion. This may happen due to a change in laws or regulations, or a change
in a portfolio's investment objectives or restrictions, or because the portfolio
is no longer available for investment, or for some other reason. A substituted
portfolio may have different fees and expenses. Substitution may be made with
respect to existing contract value or future premium payments, or both for some
or all classes of Contracts. Furthermore, we may close subaccounts to allocation
of premium payments or contract value, or both for some or all classes of
Contracts, at any time in our sole discretion. However, before any such
substitution, we would need the approval of the Securities and Exchange
Commission and applicable state insurance departments. We will notify you of any
substitutions.
We may also add new subaccounts to the Account, eliminate subaccounts in the
Account, deregister the Account under the Investment Company Act of 1940 (the
"1940 Act"), make any changes required by the 1940 Act, operate the Account as a
managed investment company under the 1940 Act or any other form permitted by
law, transfer all or a portion of the assets of a subaccount or separate account
to another subaccount or separate account pursuant to a combination or
otherwise, and create new separate accounts. Before we make certain changes we
need approval of the Securities and Exchange Commission and applicable state
insurance departments. We will notify you of any changes.
CHARGES, DEDUCTIONS AND CREDITS
We deduct the charges described below to cover costs and expenses, services
provided, and risks assumed under the Contracts. The amount of a charge may not
necessarily correspond to the costs associated with providing the services or
benefits. We add the credit described below to your contract value in certain
circumstances where we realize cost reductions and administrative efficiencies.
This credit, if any, will effectively reduce the amount of the annual
asset-based insurance charge we collect.
ASSET-BASED INSURANCE CHARGE
We currently impose an asset-based insurance charge on the Account that equals
1.85% annually. It will never exceed 1.85%.
We deduct this charge daily from the net asset value of the subaccounts prior to
the annuity date. This amount compensates us for mortality risks we assume for
the annuity payment and death benefit guarantees made under the Contract. These
guarantees include making annuity payments which won't change based on our
actual mortality experience, and providing a GMDB under the Contract.
The charge also compensates us for expense risks we assume to cover Contract
maintenance expenses. These expenses may include issuing Contracts, maintaining
records, and performing accounting, regulatory compliance, and reporting
functions. Finally, this charge compensates us for costs associated with the
establishment, administration and distribution of the Contract, including
programs like transfers and Dollar Cost Averaging.
If the asset-based insurance charge is inadequate to cover the actual expenses
of mortality, maintenance, administration and distribution, we will bear the
loss. If the charge exceeds the actual expenses, we will add the excess to our
profit.
ADDITIONAL DEATH BENEFIT CHARGE
If you elect to combine the Estate Enhancer benefit, where available, with
either the Maximum Anniversary Value GMDB or Premiums Compounded at 5% GMDB, you
will pay an annual additional charge of 0.25% of the average of your contract
values as of the end of each of the prior four contract quarters. We won't
deduct this charge after the annuity date. We will impose a pro rata amount of
this charge upon surrender, annuitization, death, or termination of the rider
between contract anniversaries. We deduct this charge regardless of whether the
Estate Enhancer benefit has any value.
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CONTRACT FEE
We may charge a $50 contract fee each year. We will only impose this fee at the
end of each contract year and upon termination if the greater of contract value,
or premiums less withdrawals, is less than $75,000. Accordingly, if you have not
made any withdrawals from your Contract (or your withdrawals have not decreased
your investment in the Contract below $75,000), we will not impose this fee.
The contract fee reimburses us for additional expenses related to maintenance of
certain Contracts with lower contract values. We do not deduct the contract fee
after the annuity date. The contract fee will never increase.
If the contract fee applies, we will deduct it as follows:
- We deduct this fee from your contract value at the end of each contract
year before the annuity date.
- We deduct this fee from your contract value if you surrender the contract
on any date other than at the end of each contract year.
- We deduct this fee on a pro rata basis from all subaccounts in which your
contract value is invested.
Currently, a contract owner of more than three Contracts will be assessed no
more than $150 in contract fees annually. We reserve the right to change this
limit on contract fees at any time.
OTHER CHARGES
TRANSFER CHARGES
You may make up to twelve transfers among subaccounts per contract year without
charge. If you make more than twelve, we may, but currently do not, charge you
$25 for each extra transfer. We deduct this charge pro rata from the subaccounts
from which you are transferring contract value. Currently, transfers made by us
under the Dollar Cost Averaging Program and the Rebalancing Program will not
count toward the twelve transfers permitted among subaccounts per contract year
without charge. (See "Dollar Cost Averaging Program", "Rebalancing Program", and
"Transfers".)
TAX CHARGES
We reserve the right, subject to any necessary regulatory approval, to charge
for assessments or federal premium taxes or federal, state or local excise,
profits or income taxes measured by or attributable to the receipt of premiums.
We also reserve the right to deduct from the Account any taxes imposed on the
Account's investment earnings. (See "Tax Status of the Contract".)
FUND EXPENSES
In calculating net asset value, the Funds deduct advisory fees and operating
expenses from assets. (See "Fee Table".) Information about those fees and
expenses also can be found in the prospectuses for the Funds, and in the
applicable Statement of Additional Information for each Fund.
PREMIUM TAXES
Various states impose a premium tax on annuity premiums when they are received
by an insurance company. In other jurisdictions, a premium tax is paid on the
contract value on the annuity date.
Premium tax rates vary from jurisdiction to jurisdiction and currently range
from 0% to 5%. Although we pay these taxes when due, we won't deduct them from
your contract value until the annuity date. In those jurisdictions that do not
allow an insurance company to reduce its current taxable premium income by the
amount of any withdrawal, surrender or death benefit paid, we will also deduct a
charge for these taxes on any withdrawal, surrender or death benefit paid under
the Contract.
Premium tax rates are subject to change by law, administrative interpretations,
or court decisions. Premium tax amounts will depend on, among other things, the
contract owner's state of residence, our status within that state, and the
premium tax laws of that state.
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CONTRACT VALUE CREDIT
We may add a Contract Value Credit to your contract value if your contract value
reaches certain levels as shown below. The contract values of multiple contracts
(including other contracts issued by us or an affiliate) cannot be added
together to reach these levels. The amount, if any, is added on the last
business day of each calendar quarter as the sum of Contract Value Credits
determined for each month within that calendar quarter. Contract Value Credits,
if any, will also be credited on a pro rata basis upon termination of the
Contract due to full withdrawal, annuitization, or receipt of due proof of
death. Contract Value Credits are determined as follows:
(a) Determine the Contract Value on the last business day of the month or
date of Contract termination ("Calculation Date")
(b) Allocate the Contract Value among the tiers shown below
(c) Multiply the amount in each tier by the corresponding annual credit
percentage
(d) Sum the results of each tier
(e) Multiply the number of days that the Contract was in force since the
last Calculation Date (excluding the contract date)
(f) Divide by 365
CONTRACT VALUE TIER ANNUAL CREDIT PERCENTAGE
------------------- ------------------------
Less than $250,000.......................................... 0.00%
Next $250,000............................................... 0.20%
Next $250,000............................................... 0.30%
Next $250,000............................................... 0.40%
Next $1,000,000............................................. 0.50%
Next $3,000,000............................................. 0.65%
Excess over $5,000,000...................................... 0.75%
FEATURES AND BENEFITS OF THE CONTRACT
As we describe the contract, we will often use the word "you". In this context
"you" means "contract owner".
OWNERSHIP OF THE CONTRACT
The contract owner is entitled to exercise all rights under the Contract. Unless
otherwise specified, the purchaser of the Contract will be the contract owner.
The Contract can be owned by a trust or a corporation. However, special tax
rules apply to Contracts owned by "non-natural persons" such as corporations or
trusts. If you are a human being, you are considered a "natural person." You may
designate a beneficiary. If you die, the beneficiary will receive a death
benefit. You may also designate an annuitant. You may change the annuitant at
any time prior to the annuity date. If you don't select an annuitant, you are
the annuitant.
If a non-natural person owns the Contract and changes the annuitant, the
Internal Revenue Code (IRC) requires us to treat the change as the death of a
contract owner. We will then pay the beneficiary the death benefit.
Only spouses may be co-owners of the Contract, except in Pennsylvania, New
Jersey, and Oregon, and when the Contract is issued in exchange for another
contract. When co-owners are established, they exercise all rights under the
Contract jointly unless they elect otherwise. Co-owner spouses must each be
designated as beneficiary for the other. Co-owners may also designate a
beneficiary to receive benefits on the surviving co-owner's death. Qualified
contracts may not have co-owners.
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You may assign the Contract to someone else by giving notice to our Service
Center. Only complete ownership of the Contract may be assigned to someone else.
You can't do it in part. An assignment to a new owner cancels all prior
beneficiary designations except a prior irrevocable beneficiary designation.
Assignment of the Contract may have tax consequences or may be prohibited on
certain qualified contracts, so you should consult with a qualified tax adviser
before assigning the Contract. (See "Federal Income Taxes".)
ISSUING THE CONTRACT
ISSUE AGE
You can buy a nonqualified Contract if you (and any co-owner) are less than 80
years old. Annuitants on nonqualified Contracts must be less than 80 years old
when we issue the Contract. For qualified Contracts owned by natural persons,
the contract owner and annuitant must be the same person. Contract owners and
annuitants on qualified Contracts must be less than 70 1/2 years old when we
issue the Contract.
INFORMATION WE NEED TO ISSUE THE CONTRACT
Before we issue the Contract, we need certain information from you. We may
require you to complete and return a written application in certain
circumstances, such as when the Contract is being issued to replace, or in
exchange for, another annuity or life insurance contract. Once we review and
approve the application or the information provided, and you pay the initial
premium, we'll issue a Contract. Generally, we'll issue the Contract and invest
the premium within two business days of our receiving your premium. If we
haven't received necessary information within five business days, we will return
the premium and no Contract will be issued.
TEN DAY RIGHT TO REVIEW
When you get the Contract, review it carefully to make sure it is what you
intended to purchase. Generally, within ten days after you receive the Contract,
you may return it for a refund. The Contract will then be deemed void. Some
states allow a longer period of time to return the Contract, particularly if the
Contract is replacing another contract. To get a refund, return the Contract to
our Service Center or to the Financial Advisor who sold it. We will then refund
the greater of all premiums paid into the Contract or the contract value as of
the date the Contract is returned. For contracts issued in Pennsylvania, we'll
refund the contract value as of the date the Contract is returned.
PREMIUMS
MINIMUM AND MAXIMUM PREMIUMS
Initial premium payments must be $75,000 or more. Subsequent premium payments
generally must be $50 or more. You can make subsequent premium payments at any
time before the annuity date. The maximum premium that will be accepted without
Company approval is $1,000,000. We also reserve the right to reject subsequent
premium payments.
The Contract is available as a non-qualified contract or may be issued as an IRA
or purchased through an established IRA or Roth IRA custodial account with
MLPF&S. Federal law limits maximum annual contributions to qualified contracts.
Transfer amounts from tax sheltered annuity plans that are not subject to the
Employee Retirement Income Security Act of 1974, as amended, will be accepted as
premium payments, as permitted by law. Other premium payments will not be
accepted under a Contract used as a tax sheltered annuity. We may waive the $50
minimum for premiums paid under IRA Contracts held in custodial accounts with
MLPF&S where you're transferring the complete cash balance of such account into
a Contract.
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HOW TO MAKE PAYMENTS
You can pay premiums directly to our Service Center at the address printed on
the first page of this Prospectus or have money debited from your MLPF&S
brokerage account.
AUTOMATIC INVESTMENT FEATURE
You may make systematic premium payments on a monthly, quarterly, semi-annual or
annual basis. Each payment must be for at least $50. Premiums paid under this
feature must be deducted from an MLPF&S brokerage account specified by you and
acceptable to us. You must specify how premiums paid under this feature will be
allocated among the subaccounts. If you select the Rebalancing Program, premiums
will be allocated based on the subaccounts and percentages you have selected for
the program. You may change the specified premium amount, the premium
allocation, or cancel the Automatic Investment Feature at any time upon notice
to us. We reserve the right to make changes to this program at any time.
PREMIUM INVESTMENTS
For the first 14 days following the contract date, we'll hold all premiums in
the Domestic Money Market V.I. Subaccount. After the 14 days, we'll reallocate
the contract value to the subaccounts you selected. (In Pennsylvania, we'll
invest all premiums as of the contract date in the subaccounts you selected.)
Currently, you may allocate your premium among all of the available subaccounts.
Allocations must be made in whole numbers. For example, 12% of a premium
received may be allocated to the Levin Large Cap Value Subaccount, 58% allocated
to the Lazard International Subaccount, and 30% to the Lord Abbett Government
Securities Subaccount. However, you may not allocate 33 1/3% to the Levin Large
Cap Value Subaccount and 66 2/3% to the Lord Abbett Government Securities
Subaccount. If we don't get allocation instructions when we receive subsequent
premiums, we will allocate those premiums according to the allocation
instructions you last gave us. We reserve the right to modify the limit on the
number of subaccounts to which future allocations may be made.
ACCUMULATION UNITS
Each subaccount has a distinct value, called the accumulation unit value. The
accumulation unit value for a subaccount varies daily with the performance and
expenses of the corresponding Fund. We use this value to determine the number of
subaccount accumulation units represented by your investment in a subaccount.
HOW ARE MY CONTRACT TRANSACTIONS PRICED?
We calculate an accumulation unit value for each subaccount at the close of
business on each day that the New York Stock Exchange is open. Transactions are
priced, which means that accumulation units in your Contract are purchased
(added to your Contract) or redeemed (taken out of your contract), at the unit
value next calculated after our Service Center receives notice of the
transaction. For premium payments, transfers into a subaccount, or Contract
Value Credits, units are purchased. For payment of Contract proceeds (i.e.,
withdrawals, surrenders, annuitization, and death benefits), transfers out of a
subaccount, and deductions for any contract fee, any additional death benefit
charge, any transfer charge, and any premium taxes due, units are redeemed.
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HOW DO WE DETERMINE THE NUMBER OF UNITS?
We determine the number of accumulation units purchased by dividing the dollar
value of the premium payment, amount transferred into the subaccount, or
Contract Value Credit by the value of one accumulation unit for that subaccount
for the valuation period in which the premium payment, transfer, or Contract
Value Credit is made. Similarly, we determine the number of accumulation units
redeemed by dividing the dollar value of the amount of the Contract proceeds
(i.e., withdrawals, surrenders, annuitization, and death benefits), transfers
out of a subaccount, and deductions for any contract fee, any additional death
benefit charge, any transfer charge, and any premium taxes due from a subaccount
by the value of one accumulation unit for that subaccount for the valuation
period in which the redemption is made. The number of subaccount accumulation
units for a Contract will therefore increase or decrease as these transactions
are made. The number of subaccount accumulation units for a Contract will not
change as a result of investment experience or the deduction of asset-based
insurance charges. Instead, this charge and investment experience are reflected
in the accumulation unit value.
When we establish a subaccount, we set an initial value for an accumulation unit
(usually, $10). Accumulation unit values increase, decrease, or stay the same
from one valuation period to the next. An accumulation unit value for any
valuation period is determined by multiplying the accumulation unit value for
the prior valuation period by the net investment factor for the subaccount for
the current valuation period.
The net investment factor is an index used to measure the investment performance
of a subaccount from one valuation period to the next. For any subaccount, we
determine the net investment factor by dividing the value of the assets of the
subaccount for that valuation period by the value of the assets of the
subaccount for the preceding valuation period. We subtract from that result the
daily equivalent of the asset-based insurance charge for the valuation period.
We also take reinvestment of dividends and capital gains into account when we
determine the net investment factor.
We may adjust the net investment factor to make provisions for any change in tax
law that requires us to pay tax on earnings in the Account or any charge that
may be assessed against the Account for assessments or premium taxes or federal,
state or local excise, profits or income taxes measured by or attributable to
the receipt of premiums. (See "Other Charges".)
ADDITIONAL PROVISIONS APPLICABLE TO ALL CONTRACTS
DEATH OF ANNUITANT PRIOR TO ANNUITY DATE
If the annuitant dies before the annuity date, and the annuitant is not a
contract owner, the owner, provided the owner is a natural person, may designate
a new annuitant. If a new annuitant is not designated, the contract owner will
become the annuitant. If any contract owner is not a natural person, no new
annuitant may be named and the death benefit will be paid to the beneficiary.
TRANSFERS AMONG SUBACCOUNTS
Before the annuity date, you may transfer all or part of your contract value
among the subaccounts up to twelve times per contract year without charge. You
can make additional transfers among subaccounts, but we may charge you $25 for
each extra transfer. We will deduct the transfer charge pro rata from among the
subaccounts you're transferring from. Currently, transfers made by us under the
Dollar Cost Averaging
27
Program and the Rebalancing Program will not count toward the twelve transfers
permitted among subaccounts per contract year without charge. (See "Dollar Cost
Averaging Program" and "Rebalancing Program".) We reserve the right to change
the number of additional transfers permitted each contract year.
Transfers among subaccounts may be made in specific dollar amounts or as a
percentage of contract value. You must transfer at least $100 or the total value
of a subaccount, if less.
You may request transfers in writing or by telephone, once we get proper
telephone transfer authorization. Transfer requests may also be made through
your Merrill Lynch Financial Advisor, or another person you designate, once we
receive proper authorization. Transfers will take effect as of the end of the
valuation period on the date the Service Center receives the request. We will
consider telephone transfer requests received after 4:00 p.m. (ET) to be
received the following business day.
An excessive number of transfers, including short-term "market timing"
transfers, may adversely affect the performance of the underlying Fund in which
a subaccount invests. If, in our sole opinion, a pattern of excessive transfers
develops, we reserve the right not to process a transfer request. We also
reserve the right not to process a transfer request when the sale or purchase of
shares of a Fund is not reasonably practicable due to actions taken or
limitations imposed by the Fund.
DOLLAR COST AVERAGING PROGRAM
WHAT IS IT?
The Contract offers an optional transfer program called Dollar Cost Averaging
("DCA"). This program allows you to reallocate money at monthly intervals from a
designated subaccount to one or more other subaccounts. The DCA Program is
intended to reduce the effect of short term price fluctuations on investment
cost. Since we transfer the same dollar amount to selected subaccounts monthly,
the DCA Program allows you to purchase more accumulation units when prices are
low and fewer accumulation units when prices are high. Therefore, you may
achieve a lower average cost per accumulation unit over the long-term. However,
it is important to understand that a DCA Program does not assure a profit or
protect against loss in a declining market. If you choose to participate in the
DCA Program you should have the financial ability to continue making investments
through periods of fluctuating markets.
If you choose to participate in the DCA Program, each month we will transfer
amounts from the subaccount that you designate and allocate them, in accordance
with your allocation instructions, to the subaccounts that you select.
If you choose the Rebalancing Program, you cannot use the DCA Program. We
reserve the right to make changes to this program at any time.
PARTICIPATING IN THE DCA PROGRAM
You can choose the DCA Program any time before the annuity date. To choose the
DCA Program, we must receive a written request from you. Once you start using
the DCA Program, you must continue it for at least three months. After three
months, you may cancel the DCA Program at any time by notifying us in writing.
Once you reach the annuity date, you may no longer use this program.
MINIMUM AMOUNTS
To elect the DCA Program, you need to have a minimum amount of money in the
designated subaccount. We determine the amount required by multiplying the
specified length of your DCA Program in months by your specified monthly
transfer amount. Amounts of $100 or more must be allotted for transfer each
month in the DCA Program. We reserve the right to change these minimums.
Allocations must be designated in whole percentage increments. No specific
dollar amount designations may be made. Should the amount in your selected
subaccount drop below the selected monthly transfer amount, we'll notify you
that you need to put more money in to continue the program.
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WHEN DO WE MAKE DCA TRANSFERS?
You select the date for DCA transfers. We will make the first DCA transfer on
the selected date following the later of 14 days after the contract date or the
date we receive notice of your DCA election at our Service Center. We'll make
subsequent DCA transfers on the same day of each succeeding month. Currently, we
don't charge for DCA transfers; they are in addition to the twelve annual
transfers permitted without charge under the Contract.
REBALANCING PROGRAM
Under the Rebalancing Program, we will allocate your premiums and rebalance your
contract value quarterly, semi-annually, or annually according to the frequency,
subaccounts and percentages you select based on your investment goals and risk
tolerance.
After you elect the Rebalancing Program, we allocate your premiums in accordance
with the subaccounts and percentages you have selected. Depending on the
frequency you select (on the last business day of each calendar quarter for
quarterly rebalancing, on the last business day of June and December for
semi-annual rebalancing, or on the last business day of December for annual
rebalancing), we automatically reallocate your contract value to maintain the
particular percentage allocation among the subaccounts that you have selected.
You may change the frequency of your Rebalancing Program at any time.
We perform this periodic rebalancing to take account of:
- increases and decreases in contract value in each subaccount due to
subaccount performance, and
- increases and decreases in contract value in each subaccount due to
withdrawals, transfers, and premiums.
The Rebalancing Program can be elected at issue or at any time after issue. You
may elect the Rebalancing Program in writing or by telephone, once we get proper
telephone transfer authorization. If you elect the Rebalancing Program, you must
include all contract value in the program. We allocate all systematic investment
premiums and, unless you instruct us otherwise, all other premiums in accordance
with the subaccount allocations that you have selected. The percentages that you
select under the Rebalancing Program will override any prior percentage
allocations that you have chosen and we will allocate all future premiums
accordingly. You may change your allocations at any time. Once elected, you may
instruct us, in a written form satisfactory to us, at any time to terminate the
program. Currently, we don't charge for transfers under this program; they are
in addition to the twelve annual transfers permitted without charge under the
Contract.
We reserve the right to make changes to this program at any time. If you choose
the DCA Program, you cannot use the Rebalancing Program.
WITHDRAWALS AND SURRENDERS
WHEN AND HOW WITHDRAWALS ARE MADE
Before the annuity date, you may make lump-sum withdrawals from the Contract at
any time during the contract year. In addition, you may make systematic
withdrawals, discussed below. Withdrawals are subject to tax to the extent of
gain and prior to age 59 1/2 may also be subject to a 10% federal penalty tax.
Certain withdrawals from Roth IRAs are tax-free, and withdrawals from tax
sheltered annuities are not generally permitted before age 59 1/2, death,
disability, separation from service or hardship. (See "Federal Income Taxes".)
Unless you direct us otherwise, we will make lump-sum withdrawals from
subaccounts in the same proportion as the subaccounts bear to your contract
value. You may make a withdrawal request in writing to our Service Center. You
may withdraw money by telephone, once you've submitted a proper telephone
authorization form to our Service Center, but only if the amount withdrawn is to
be paid into a Merrill
29
Lynch brokerage account or sent to the address of record. We will consider
telephone withdrawal requests received after 4:00 p.m. (ET) to be received the
following business day.
MINIMUM AMOUNTS
The minimum amount that may be withdrawn is $100. At least $5,000 must remain in
the Contract after you make a withdrawal. We reserve the right to change these
minimums.
SYSTEMATIC WITHDRAWAL PROGRAM
You may have automatic withdrawals of a specified dollar amount made monthly,
quarterly, semi-annually or annually. Each withdrawal must be for at least $100
and the remaining contract value must be at least $5,000. You may change the
specified dollar amount or frequency of withdrawals or stop the Systematic
Withdrawal Program at any time upon notice to us. We will make systematic
withdrawals from subaccounts in the same proportion as the subaccounts bear to
your contract value. We reserve the right to restrict the maximum amount that
may be withdrawn each year under the Systematic Withdrawal Program and to make
any other changes to this program at any time.
SURRENDERS
At any time before the annuity date you may surrender the Contract through a
full withdrawal. The Contract must be delivered to our Service Center. We will
pay you an amount equal to the contract value as of the end of the valuation
period when we process the surrender, minus any applicable contract fee, minus
any applicable additional death benefit charge, plus any applicable Contract
Value Credits, and minus any applicable charge for premium taxes. (See "Charges,
Deductions and Credits.") Surrenders are subject to tax and, prior to age
59 1/2, may also be subject to a 10% federal penalty tax. Certain surrenders of
Roth IRAs are tax-free, and surrenders of tax sheltered annuities before age
59 1/2, death, disability, separation from service or hardship are generally not
permitted. (See "Federal Income Taxes".)
PAYMENTS TO CONTRACT OWNERS
We'll make any payments to you usually within seven days of our Service Center
receiving your proper request. However, we may delay any payment, or delay
processing any annuity payment or transfer request if:
(a) the New York Stock Exchange is closed;
(b) trading on the New York Stock Exchange is restricted by the Securities
and Exchange Commission;
(c) the Securities and Exchange Commission declares that an emergency
exists making it not reasonably practicable to dispose of securities
held in the Account or to determine the value of the Account's assets;
(d) the Securities and Exchange Commission by order so permits for the
protection of security holders; or
(e) payment is derived from a check used to make a premium payment which
has not cleared through the banking system.
If mandated under applicable law, we may be required to block a contract owner's
account and thereby refuse to accept any request for transfers, withdrawals,
surrenders or death benefits, until instructions are received from the
appropriate regulator.
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CONTRACT CHANGES
Requests to change the owner, beneficiary, annuitant, or annuity date of a
Contract will take effect as of the date you sign such a request, unless we have
already acted in reliance on the prior status. We are not responsible for the
validity of such a request.
If you change the owner or annuitant on a nonqualified Contract, the new owner
or annuitant must be less than 80 years old. For qualified Contracts, if you
change the owner or annuitant, the new owner or annuitant must be less than
70 1/2 years old.
The Estate Enhancer benefit will terminate upon a non-spousal ownership change,
or upon a spousal ownership change where the new spousal owner was over attained
age 75 as of the effective date of the Estate Enhancer rider. Any applicable
additional death benefit charge will be deducted on the date that the Estate
Enhancer benefit terminates.
You may change the owner of the Contract to your spouse without terminating the
Estate Enhancer benefit provided that your spouse is younger than attained age
76 on the effective date. After such a change in owner, the amount of the Estate
Enhancer benefit will be based on the attained age of your spouse on the
effective date, if older than the oldest owner since that date.
If the Estate Enhancer benefit terminates and you did not elect the Estate
Enhancer benefit in combination with either the Maximum Anniversary Value GMDB
or the Premiums Compounded at 5% GMDB, the asset-based insurance charge will not
be reduced. This results in a loss of benefits without a corresponding reduction
in charges.
DEATH BENEFIT
GENERAL
Regardless of investment experience, the Contract provides a guaranteed minimum
death benefit ("GMDB") to the beneficiary if you die before the annuity date.
(If an owner is a non-natural person, then the death of the annuitant will be
treated as the death of the owner.)
We will pay the death benefit in a lump sum unless the beneficiary chooses an
annuity payment option available under the Contract. (See "Annuity Options".)
However, if you die before the annuity date, federal tax law generally requires
us to distribute the entire contract value within five years of the date of
death. Special rules may apply to a surviving spouse. (See "Federal Income
Taxes".)
We determine the death benefit as of the date we receive certain information at
our Service Center. We call this information due proof of death. It consists of
the Beneficiary Statement, a certified death certificate, and any additional
documentation we may need to process the death claim. If we haven't received the
other documents within 60 days following our receipt of a certified death
certificate, we will consider due proof of death to have been received and we
will pay the death benefit in a lump sum.
If the age of an owner or annuitant, if the owner is a non-natural person, is
misstated, any death benefit will be adjusted to reflect the correct age. Unless
you irrevocably designated a beneficiary, you may change the beneficiary at any
time before the annuity date.
Death benefit proceeds, including any Estate Enhancer benefit, are taxable to
the extent of gain. (See "Federal Income Taxes -- Taxation of Death Benefit
Proceeds".)
DEATH BENEFIT OPTIONS
Before we issue the Contract, you must irrevocably choose one of the following
death benefit options:
- Maximum Anniversary Value GMDB;
- Premiums Compounded at 5% GMDB (not available in Washington); or
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- Estate Enhancer benefit with Return of Premium GMDB (not available in
Washington, Illinois, and Minnesota; on qualified contracts; or if the
contract owner, or the annuitant, if the contract owner is a non-natural
person, is over 75 years of age).
For an additional annual charge, you may elect to combine the Estate Enhancer
benefit with either the Maximum Anniversary Value GMDB or the Premiums
Compounded at 5% GMDB. The additional death benefit charge equals 0.25% of the
average of your contract values as of the end of each of the prior four contract
quarters.
CALCULATION OF DEATH BENEFIT
The death benefit is equal to the greater of:
(i) the contract value; or
(ii) GMDB.
Any applicable Estate Enhancer benefit will be added to the death benefit.
MAXIMUM ANNIVERSARY VALUE GMDB
If you choose Maximum Anniversary Value GMDB, the GMDB is equal to the greater
of:
(i) the premiums paid into the Contract less "adjusted" withdrawals from
the Contract; or
(ii) the Maximum Anniversary Value.
For this formula, each "adjusted" withdrawal equals the amount withdrawn
multiplied by the greater of [(a) or (b)] / (c) where:
a = premiums paid into the Contract less previous "adjusted" withdrawals;
b = the Maximum Anniversary Value; and
c = the contract value.
Values for (a), (b), and (c) are calculated immediately prior to the
withdrawal.
The Maximum Anniversary Value is equal to the greatest anniversary value for the
Contract. An anniversary value is equal to the contract value on a contract
anniversary increased by premium payments and decreased by "adjusted"
withdrawals since that anniversary. "Adjusted" withdrawals are calculated
according to the formula that appears immediately above this section.
To determine the Maximum Anniversary Value, we will calculate an anniversary
value for each contract anniversary through the earlier of your attained age 80
or the anniversary on or prior to your date of death. If the contract has
co-owners, we will calculate the anniversary value through the earlier of the
older owner's attained age 80 or the anniversary on or prior to any owner's date
of death if a death benefit is payable. If an owner is a non-natural person,
then the annuitant's age, rather than the owner's, will be used.
We will calculate the Maximum Anniversary Value based on your age (or the age of
the older owner, if the Contract has co-owners, or the annuitant, if the owner
is a non-natural person) on the contract date. Subsequent changes in owner will
not increase the period of time used to determine the Maximum Anniversary Value.
If a new owner has not reached attained age 80 and is older than the owner whose
age is being used to determine the Maximum Anniversary Value at the time of the
ownership change, the period of time used in the calculation of the Maximum
Anniversary Value will be based on the age of the new owner at the time of the
ownership change. If at the time of an ownership change the new owner is
attained age 80 or over, we will use the Maximum Anniversary Value as of the
anniversary on or prior to the ownership change, increased by premium payments
and decreased by "adjusted" withdrawals since that anniversary.
FOR AN EXAMPLE OF THE CALCULATION OF THE MAXIMUM ANNIVERSARY VALUE GMDB, SEE
APPENDIX A.
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PREMIUMS COMPOUNDED AT 5% GMDB
If you choose Premiums Compounded at 5% GMDB, the GMDB is equal to:
(i) premiums paid into the Contract with interest compounded daily from
the date of receipt of premium to yield 5% annually, less
(ii) "adjusted" withdrawals from the Contract with interest compounded
daily from the date of withdrawal to yield 5% annually.
Interest will continue to be credited until the earliest of the older contract
owner's attained age 80, the last day of the twentieth contract year or the date
of death.
You may withdraw up to 5% of the value of the Premiums Compounded at 5% GMDB at
the beginning of each Contract Year and withdrawals will be "adjusted" so that
they reduce the Premiums Compounded at 5% GMDB dollar-for-dollar for that
Contract Year.
Any withdrawal that causes the total of all withdrawals since the beginning of a
Contract Year to exceed 5% of the Premiums Compounded at 5% GMDB at the
beginning of that Contract Year will be "adjusted" so that it reduces the GMDB
proportionally. The adjustment is determined by multiplying the withdrawal by
the ratio of the Premiums Compounded at 5% GMDB by the contract value, where
both values are calculated immediately prior to the withdrawal. This adjustment
may cause the Premiums Compounded at 5% GMDB to be reduced by more than the
amount of the withdrawal.
We will calculate Premiums Compounded at 5% GMDB based on your age (or the age
of the older owner, if the Contract has co-owners, or the annuitant, if the
owner is a non-natural person) on the contract date. Subsequent changes in owner
will not increase the period of time that the 5% interest will compound. If a
new owner has not reached attained age 80 and is older than the owner whose age
is being used to determine the Premiums Compounded at 5% GMDB at the time of
ownership change, the period of time used in the calculation of the Premiums
Compounded at 5% GMDB will be based on the age of the new owner at the time of
ownership change. If at the time of an ownership change the new owner is
attained age 80 or over, we will use the Premiums Compounded at 5% GMDB as of
the anniversary on or prior to the ownership change, increased by premium
payments and decreased by "adjusted" withdrawals since that anniversary.
FOR AN EXAMPLE OF THE CALCULATION OF THE PREMIUMS COMPOUNDED AT 5% GMDB, SEE
APPENDIX B.
ESTATE ENHANCER BENEFIT
If you choose the Estate Enhancer benefit, coverage in addition to your GMDB is
provided. The Estate Enhancer benefit is designed to help offset expenses,
including income taxes, attributable to payment of the death benefit.
You cannot elect the Estate Enhancer benefit if you (or the older owner, if the
Contract has co-owners, or the annuitant, if the owner is a non-natural person)
are age 76 or older on the contract date. Currently, the Estate Enhancer benefit
cannot be elected on qualified Contracts and is not available in the states of
Illinois, Minnesota and Washington. Estate Enhancer availability is subject to
our approval if "Estate Enhancer premiums" on all contracts issued by us with
the same owner(s) exceed $2,200,000. "Estate Enhancer premiums" means initial
premium plus subsequent premium payments if the effective date is the contract
date, and contract value on the effective date plus subsequent premiums payments
if the effective date is other than the contract date. Once you elect the Estate
Enhancer benefit, you cannot cancel it (except in North Dakota). The Estate
Enhancer benefit, however, will terminate if you annuitize or surrender the
contract, upon certain ownership changes, or if the Contract otherwise
terminates (See "Contract Changes").
THE AMOUNT OF THE ESTATE ENHANCER BENEFIT DEPENDS UPON THE AMOUNT OF GAIN IN
YOUR CONTRACT. BECAUSE WITHDRAWALS AND POOR PERFORMANCE OF THE FUNDS WILL REDUCE
THE AMOUNT OF GAIN IN YOUR CONTRACT, THEY WILL REDUCE THE VALUE OF THE ESTATE
ENHANCER BENEFIT. IT IS POSSIBLE THAT THE ESTATE ENHANCER BENEFIT MAY NOT HAVE
ANY VALUE.
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The percentage used to determine the benefit depends on your age (or the age of
the older owner, if the Contract has co-owners, or the annuitant, if the owner
is a non-natural person) on the effective date. The effective date is the
contract date unless the Contract is continued under the spousal continuation
provision, in which case the effective date is the date the surviving spouse
elects to continue the Contract. If you are attained age 69 or under on the
effective date, your benefit is equal to 45% of the Estate Enhancer gain (but
not less than zero). In no event will the benefit exceed 45% of net premiums
(excluding any premiums paid within one year prior to the death of any owner, or
the annuitant, if the owner is a non-natural person, and any premiums paid
between the date of death and the date we receive notification of death). Estate
Enhancer gain is the contract value on the date we calculate the death benefit
minus net premiums paid into the Contract. Net premiums equal the premiums paid
into the Contact less the portion of each withdrawal considered to be premium.
Withdrawals reduce Estate Enhancer gain first and only withdrawals in excess of
Estate Enhancer gain reduce net premiums. If you (or the older owner, if the
Contract has co-owners, or the annuitant, if the owner is a non-natural person)
are attained age 70 or over on the contract date, the percentages are reduced
from 45% to 30% in the calculation above.
See "Contract Changes" for the effect of an ownership change on the Estate
Enhancer benefit.
FOR AN EXAMPLE OF THE CALCULATION OF THE ESTATE ENHANCER BENEFIT, SEE APPENDIX
C.
RETURN OF PREMIUM GMDB
If you choose the Estate Enhancer benefit without adding it to either the
Maximum Anniversary Value GMDB or the Premiums Compounded at 5% GMDB, a Return
of Premium GMDB is provided. The Return of Premium GMDB is equal to:
(i) premiums paid into the Contract, less
(ii) "adjusted" withdrawals from the Contract.
For this formula, each "adjusted" withdrawal equals the amount withdrawn
multiplied by (a) / (b) where:
a = premiums paid into the Contract less previous "adjusted" withdrawals; and
b = the contract value.
Both (a) and (b) are calculated immediately prior to the withdrawal.
SPOUSAL CONTINUATION
If your beneficiary is your surviving spouse, your spouse may elect to continue
the Contract if you die before the annuity date. Your spouse becomes the
contract owner and the beneficiary until your spouse names a new beneficiary. If
the death benefit, including any Estate Enhancer benefit, which would have been
paid to the surviving spouse is greater than the contract value as of the date
we determine the death benefit, we will increase the contract value of the
continued Contract to equal the death benefit we would have paid to the
surviving spouse. Your interest in each subaccount then available for investment
will be increased by any excess of the death benefit over your contract value
multiplied by the ratio of your contract value in each subaccount available for
investment to your total contract value in the subaccounts available for
investment prior to the increase.
If the surviving spouse is attained age 75 or younger on the date he or she
elects to continue the Contract, the Estate Enhancer benefit will also be
continued, if applicable. We will use the date the surviving spouse elects to
continue the Contract as the effective date, and the percentages used in the
calculations described under the Estate Enhancer Benefit will be based on the
surviving spouse's attained age on the effective date. Estate Enhancer gain and
net premiums are calculated from the new effective date and the contract value
on the effective date is considered a premium for purpose of these calculations
(see "Estate Enhancer Benefit").
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If the surviving spouse is attained age 76 or older on the date he or she elects
to continue the Contract, the Estate Enhancer benefit will terminate. If the
Estate Enhancer benefit terminates and you did not elect the Estate Enhancer
benefit in combination with either the Maximum Anniversary Value GMDB or the
Premiums Compounded at 5% GMDB, the asset-based insurance charge will not be
reduced. This results in a loss of benefits without a corresponding reduction in
charges.
ANNUITY PAYMENTS
We'll make the first annuity payment on the annuity date, and payments will
continue according to the annuity option selected. When you first buy the
Contract, the annuity date for non-qualified Contracts is the first day of the
month following the annuitant's 95th birthday. However, you may specify an
earlier annuity date but that date cannot be before the first Contract
Anniversary. You may change the annuity date at any time before the annuity
date. Generally, the annuity date for IRA or tax sheltered annuity Contracts is
when the owner/annuitant reaches age 70 1/2. However, we will not require IRA
and tax sheltered annuities to annuitize at age 70 1/2 if distributions from the
Contract are not necessary to meet federal minimum distribution requirements.
Contract owners may select from a variety of fixed annuity payment options, as
outlined below in "Annuity Options." If you don't choose an annuity option,
we'll use the Life Annuity with Payments Guaranteed for 10 Years annuity option
when the annuitant reaches age 95 (age 70 1/2 for an IRA Contract or tax
sheltered annuity). You may change the annuity option before the annuity date.
We reserve the right to limit annuity options available to IRA contract owners
to comply with the Internal Revenue Code or regulations under it.
We determine the dollar amount of annuity payments by applying your contract
value less any applicable premium tax (reduced by any additional death benefit
charge collected upon termination and increased by any Contract Value Credit
paid upon termination) on the annuity date to our then current annuity purchase
rates. Purchase rates show the amount of periodic payment that a $1000 value
buys. These rates are based on the annuitant's age and sex (where permitted) at
the time payments begin, and will assume interest of not less than 3% per year.
The rates will never be less than those shown in the Contract.
If the age and/or sex of the annuitant was misstated to us, resulting in an
incorrect calculation of annuity payments, we will adjust future annuity
payments to reflect the correct age and/or sex. We will deduct any amount we
overpaid as the result of a misstatement from future payments with 6% annual
interest charges. Likewise, if we underpaid any amount as the result of a
misstatement, we correct it with the next payment made with 6% annual interest
credited.
If the contract value on the annuity date after the deduction of any applicable
premium taxes is less than $5,000, we may cash out your Contract in a lump sum.
If any annuity payment would be less than $50 (or a different minimum amount, if
required by state law), we may change the frequency of payments so that all
payments will be at least $50 (or the minimum amount required by state law).
Unless you tell us differently, we'll make annuity payments directly to your
Merrill Lynch brokerage account.
ANNUITY OPTIONS
We currently provide the following fixed annuity payment options. After the
annuity date, your Contract does not participate in the performance of the
Account. We may in the future offer more options. Once you begin to receive
annuity payments, you cannot change the payment option, payment amount, or the
payment period. If you or the annuitant dies while guaranteed payments remain
unpaid, several options provide the ability to take the present value of future
guaranteed payments in a lump sum.
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HOW WE DETERMINE PRESENT VALUE OF FUTURE
GUARANTEED ANNUITY PAYMENTS
Present value refers to the amount of money needed today to fund the remaining
guaranteed payments under the annuity payment option you select. The primary
factor in determining present value is the interest rate assumption we use. If
you are receiving annuity payments under an option that gives you the ability to
take the present value of future payments in a lump sum and you elect to take
the lump sum we will use the same interest rate assumption in calculating the
present value that we used to determine your payment stream at the time your
annuity payments commenced.
PAYMENTS OF A FIXED AMOUNT
We will make equal payments in an amount you choose until the sum of all
payments equals the contract value applied, increased for interest credited of
at least 3%. The amount you choose must provide at least five years of payments.
These payments don't depend on the annuitant's life. If the annuitant dies
before the guaranteed amount has been paid, you may elect to have payments
continued for the amount guaranteed or to receive the present value of the
remaining guaranteed payments in a lump sum. If the contract owner dies while
guaranteed amounts remain unpaid, the beneficiary may elect to receive the
present value of the remaining guaranteed payments in a lump sum.
PAYMENTS FOR A FIXED PERIOD
We will make equal payments for a period you select of at least five years.
These payments don't depend on the annuitant's life. If the annuitant dies
before the end of the period, you may elect to have payments continued for the
period guaranteed or to receive the present value of the remaining guaranteed
payments in a lump sum. If the contract owner dies while guaranteed amounts
remain unpaid, the beneficiary may elect to receive the present value of the
remaining guaranteed payments in a lump sum.
*LIFE ANNUITY
We make payments for as long as the annuitant lives. Payments will cease with
the last payment made before the annuitant's death.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 5, 10, 15, OR 20 YEARS
We make payments for as long as the annuitant lives. In addition, even if the
annuitant dies before the period ends, we guarantee payments for either 5, 10,
15, or 20 years as you selected. If the annuitant dies before the guaranteed
period ends, you may elect to have payments continued for the period guaranteed
or to receive the present value of the remaining guaranteed payments in a lump
sum. If the contract owner dies while guaranteed amounts remain unpaid, the
beneficiary may elect to receive the present value of the remaining guaranteed
payments in a lump sum.
LIFE ANNUITY WITH GUARANTEED RETURN OF CONTRACT VALUE
We make payments for as long as the annuitant lives. In addition, even if the
annuitant dies, we guarantee payments until the sum of all annuity payments
equals the contract value applied. If the annuitant dies while guaranteed
amounts remain unpaid, you may elect to have payments continued for the amount
guaranteed or to receive the present value of the remaining guaranteed amount in
a lump sum. If the contract owner dies while guaranteed amounts remain unpaid,
the beneficiary may elect to receive the present value of the remaining
guaranteed amount in a lump sum.
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*JOINT AND SURVIVOR LIFE ANNUITY
We make payments for the lives of the annuitant and a designated second person.
Payments will continue as long as either one is living.
JOINT AND SURVIVOR LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 5, 10, 15, OR
20 YEARS
We make payments during the lives of the annuitant and a designated second
person. Payments will continue as long as either one is living. In addition,
even if the annuitant and the designated second person die before the guaranteed
period ends, we guarantee payments for either 5, 10, 15, or 20 years as you
selected. If the annuitant and the designated second person die before the end
of the period, you may elect to have payments continued for the period
guaranteed or to receive the present value of the remaining guaranteed payments
in a lump sum. If the contract owner dies while guaranteed amounts remain
unpaid, the beneficiary may elect to receive the present value of the remaining
guaranteed payments in a lump sum.
INDIVIDUAL RETIREMENT ACCOUNT ANNUITY
This annuity option is available only to IRA contract owners. Payments will be
made annually based on (a) the life expectancy of the annuitant; (b) the joint
life expectancy of the annuitant and his or her spouse; or (c) the life
expectancy of the surviving spouse if the annuitant dies before the annuity
date. Each annual payment will be determined in accordance with the applicable
Internal Revenue Service regulations. Each subsequent payment will be made on
the anniversary of the annuity date. Interest will be credited at our current
rate for this option, but will not be less than 3%. On the death of the
measuring life or lives prior to full distribution of the remaining value, we
will pay that value to the beneficiary in a lump sum.
GENDER-BASED ANNUITY PURCHASE RATES
Generally, the Contract provides for gender-based annuity purchase rates when
life annuity options are chosen. However, in states that have adopted
regulations prohibiting gender-based rates, blended unisex annuity purchase
rates will be applied to both male and female annuitants. Unisex annuity
purchase rates will provide the same annuity payments for male or female
annuitants that are the same age on their annuity dates.
Employers and employee organizations considering purchase of the Contract should
consult with their legal advisor to determine whether purchasing a Contract
containing gender-based annuity purchase rates is consistent with Title VII of
the Civil Rights Act of 1964 or other applicable law. We may offer such contract
owners Contracts containing unisex annuity purchase rates.
FEDERAL INCOME TAXES
FEDERAL INCOME TAXES
The following summary discussion is based on our understanding of current
federal income tax law as the Internal Revenue Service (IRS) now interprets it.
We can't guarantee that the law or the IRS's interpretation won't change. It
does not purport to be complete or to cover all tax situations. This discussion
is not intended as tax advice. Counsel or other tax advisors should be consulted
for further information.
We haven't considered any applicable federal gift, estate or any state or other
tax laws. Of course, your own tax status or that of your beneficiary can affect
the tax consequences of ownership or receipt of distributions.
---------------
* These options are "pure" life annuities. Therefore, it is possible for the
payee to receive only one annuity payment if the person (or persons) on whose
life (lives) payment is based dies after only one payment or to receive only
two annuity payments if that person (those persons) dies after only two
payments, etc.
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When you invest in an annuity contract, you usually do not pay taxes on your
investment gains until you withdraw the money -- generally for retirement
purposes. If your annuity is independent of any formal retirement or pension
plan, it is termed a nonqualified contract. If you invest in a variable annuity
as part of an individual retirement annuity or tax sheltered annuity, your
contract is called a qualified contract. The tax rules applicable to qualified
contracts vary according to the type of retirement plan and the terms and
conditions of the plan.
TAX STATUS OF THE CONTRACT
DIVERSIFICATION REQUIREMENTS
Section 817(h) of the Internal Revenue Code (IRC) and the regulations under it
provide that separate account investments underlying a contract must be
"adequately diversified" for it to qualify as an annuity contract under IRC
section 72. The Account, through the subaccounts, intends to comply with the
diversification requirements of the regulations under Section 817(h). This will
affect how we make investments.
OWNER CONTROL
In certain circumstances, owners of variable annuity contracts have been
considered for Federal income tax purposes to be the owners of the assets of the
separate account supporting their Contracts due to their ability to exercise
investment control over those assets. When this is the case, the contract owners
have been currently taxed on income and gains attributable to the separate
account assets. There is little guidance in this area, and some features such as
the flexibility of an owner to allocate premium payments and transfer contract
accumulation values, have not been explicitly addressed in IRS published
rulings. While we believe that the Contracts do not give owners investment
control over Account assets, we reserve the right to modify the Contracts as
necessary to prevent an owner from being treated as the owner of the Account
assets supporting the Contract.
REQUIRED DISTRIBUTIONS
To qualify as an annuity contract under Section 72(s) of the IRC, a
non-qualified annuity contract must provide that: (a) if any owner dies on or
after the annuity starting date but before all amounts under the Contract have
been distributed, the remaining amounts will be distributed at least as quickly
as under the method being used when the owner died; and (b) if any owner dies
before the annuity starting date, all amounts under the Contract will be
distributed within five years of the date of death. So long as the distributions
begin within a year of the owner's death, the IRS will consider these
requirements satisfied for any part of the owner's interest payable to or for
the benefit of a "designated beneficiary" and distributed over the beneficiary's
life or over a period that cannot exceed the beneficiary's life expectancy. A
designated beneficiary is the person the owner names as beneficiary and who
assumes ownership when the owner dies. A designated beneficiary must be a
natural person. If the deceased owner's spouse is the designated beneficiary, he
or she can continue the Contract when such contract owner dies.
The Contract is designed to comply with Section 72(s). We will review the
Contract and amend it if necessary to make sure that it continues to comply with
the section's requirements.
Other rules regarding required distributions apply to Individual Retirement
Annuities and tax sheltered annuities.
TAXATION OF ANNUITIES
IN GENERAL
IRC Section 72 governs annuity taxation generally. We believe an owner who is a
natural person usually won't be taxed on increases in the value of a contract
until there is a distribution (i.e., the owner withdraws all or part of the
accumulation or takes annuity payments). Assigning, pledging, or agreeing to
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assign or pledge any part of the accumulation usually will be considered a
distribution. Distributions of accumulated investment earnings are taxable as
ordinary income.
The owner of any annuity contract who is not a natural person (e.g., a
corporation or a trust) generally must include in income any increase in the
excess of the accumulation over the "investment in the contract" during the
taxable year. There are some exceptions to this rule and a prospective owner
that is not a natural person may wish to discuss them with a competent tax
advisor.
The following discussion applies generally to Contracts owned by a natural
person:
WITHDRAWALS AND SURRENDERS
When you take a withdrawal from a Contract, the amount received generally will
be treated as ordinary income subject to tax up to an amount equal to the excess
(if any) of the contract value immediately before the distribution over the
investment in the Contract (generally, the premiums or other consideration paid
for the Contract, reduced by any amount previously distributed from the Contract
that was not subject to tax) at that time. Other rules apply to qualified
contracts.
If you withdraw your entire contract value, you will be taxed only on the part
that exceeds your "investment in the contract."
ANNUITY PAYMENTS
Although tax consequences may vary depending on the annuity option selected
under an annuity contract, a portion of each annuity payment is generally not
taxed and the remainder is taxed as ordinary income. The non-taxable portion of
an annuity payment is generally determined in a manner that is designed to allow
you to recover your investment in the Contract ratably on a tax-free basis over
the expected stream of annuity payments, as determined when annuity payments
start. Once your investment in the Contract has been fully recovered, however,
the full amount of each annuity payment is subject to tax as ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be paid from a Contract because an owner or annuitant (if an owner
is not a natural person) has died. If the payments are made in a single sum,
they're taxed the same way a full withdrawal from the Contract is taxed. If they
are distributed as annuity payments, they're taxed as annuity payments. Because
the Estate Enhancer benefit should be treated as a taxable death benefit, we
believe that for federal tax purposes, the Estate Enhancer benefit should be
treated as an integral part of the Contract's benefits (e.g. as investment
protection benefit) and that any charges under the Contract for the Estate
Enhancer benefit should not be treated as a distribution received by the
Contract owner. However, it is possible that the IRS may take a position that
some or all of any charge for the Estate Enhancer benefit should be deemed a
taxable distribution to you. Although we do not believe that any fees associated
with the Estate Enhancer benefit should be treated as taxable withdrawals, you
should consult your tax advisor prior to electing the Estate Enhancer benefit.
PENALTY TAX ON SOME WITHDRAWALS
You may have to pay a penalty tax (10 percent of the amount treated as taxable
income) on some withdrawals. However, there is usually no penalty on
distributions:
(1) on or after you reach age 59 1/2;
(2) after you die (or after the annuitant dies, if an owner isn't an
individual);
(3) after you become disabled; or
(4) that are part of a series of substantially equal periodic (at least
annual) payments for your life (or life expectancy) or the joint lives
(or life expectancies) of you and your beneficiary.
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Other exceptions may be applicable under certain circumstances and special rules
may apply in connection with the exceptions listed above. Also, additional
exceptions apply to distributions from an Individual Retirement Annuity or tax
sheltered annuity. You should consult a tax advisor with regard to exceptions
from the penalty tax.
TRANSFERS, ASSIGNMENTS, ANNUITY DATES, OR EXCHANGES OF A CONTRACT
Transferring or assigning ownership of the Contract, designating a payee or
beneficiary who is not also the owner, selecting certain annuity dates, or
exchanging a Contract can have other tax consequences that we don't discuss
here. If you're thinking about any of those transactions, contact a tax advisor.
WITHHOLDING
Annuity distributions usually are subject to withholding for the recipient's
federal income tax liability at rates that vary according to the type of
distribution and the recipient's tax status. However, except for certain
distributions from tax sheltered annuities, recipients can usually choose not to
have tax withheld from distributions.
MULTIPLE CONTRACTS
All nonqualified deferred annuity Contracts that we (or our affiliates) issue to
the same owner during any calendar year are generally treated as one annuity
Contract for purposes of determining the amount includible in such owner's
income when a taxable distribution occurs. This could affect when income is
taxable and how much is subject to the ten percent penalty tax discussed above.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always the
possibility that the tax treatment of the Contracts could change by legislation
or other means. It is also possible that any change could be retroactive (that
is, effective prior to the date of the change). A tax advisor should be
consulted with respect to legislative developments and their effect on the
Contract.
POSSIBLE CHARGE FOR OUR TAXES
Currently we don't charge the Account for any federal, state, or local taxes on
them or the Contracts (other than premium taxes), but we reserve the right to
charge the Account or the Contracts for any tax or other cost resulting from the
tax laws that we believe should be attributed to them.
FOREIGN TAX CREDITS
To the extent that any Fund makes the appropriate election, certain foreign
taxes paid by the Fund will be treated as being paid by the Company, which may
deduct or claim a tax credit for such taxes. The benefits of any such deduction
or credit will not be passed through to the contract owners.
INDIVIDUAL RETIREMENT ANNUITIES
TRADITIONAL IRAS
Section 408 of the IRC permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity" or
"IRA." This Contract is available for purchase either as an IRA or through an
established IRA custodial account with MLPF&S. Subject to special rules, an
individual may make annual contributions of up to the lesser of the limit
specified in the IRC or 100% of compensation includible in the individual's
gross income. The contributions may be deductible in whole or in part, depending
on the individual's income. Distributions from certain pension plans may be
"rolled over" into an IRA on a tax-deferred basis without regard to these
limits. Amounts in the IRA (other than nondeductible contributions) are taxed
when distributed from the IRA. A 10% penalty tax generally applies to
distributions made before age 59 1/2, unless certain exceptions apply. IRAs have
minimum
40
distribution rules that govern the timing and amount of distributions. You
should refer to your adoption agreement or consult a tax advisor for more
information about these distribution rules. Adverse tax consequences may result
if you do not ensure that contributions, distributions and other transactions
with respect to the Contract comply with the law.
ROTH IRAS
A Contract is available for purchase by an individual who has separately
established a Roth IRA custodial account with MLPF&S. Roth IRAs, as described in
section 408A of the IRC, permit certain eligible individuals to make
non-deductible contributions to a Roth IRA in cash or as a rollover or transfer
from another Roth IRA or other IRA. Subject to special rules, an individual may
make annual contributions to a Roth IRA of up to the lesser of the limit
specified in the IRC or 100% of compensation includible in the individual's
gross income. A rollover from or conversion of an IRA to a Roth IRA is generally
subject to tax and other special rules apply. You may wish to consult a tax
advisor before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years.
Distributions from a Roth IRA generally are not taxed, except that, once
aggregate distributions exceed contributions to the Roth IRA, income tax and a
10% penalty tax may apply to distributions made (1) before age 59 1/2 (subject
to certain exceptions) or (2) during the five taxable years starting with the
year in which the first contribution is made to any Roth IRA. A 10% penalty tax
may apply to amounts attributable to a conversion from an IRA if they are
distributed during the five taxable years beginning with the year in which the
conversion was made.
OTHER TAX ISSUES FOR IRAS AND ROTH IRAS
Subject to special rules, total annual contributions to all of an individual's
IRAs and Roth IRAs may not exceed the limit specified in the IRC or 100% of
compensation includible in the individual's gross income. Distributions from an
IRA or Roth IRA generally are subject to withholding for the participant's
federal income tax liability. The withholding rate varies according to the type
of distribution and the owner's tax status. The owner will be provided the
opportunity to elect not have tax withheld from distributions.
The IRS has not reviewed the Contract for qualification as an IRA or Roth IRA,
and has not addressed in a ruling of general applicability whether certain death
benefit provisions in the Contract comport with IRA and Roth IRA qualification
requirements. Disqualification of the policy as an IRA or Roth IRA could result
in the immediate taxation of amounts held in the Contract and the imposition of
penalty taxes. The Estate Enhancer benefit is not currently available with an
IRA or Roth IRA.
TAX SHELTERED ANNUITIES
Section 403(b) of the IRC allow employees of certain Section 501(c)(3)
organizations and public schools to exclude from their gross income the premium
payments made, within certain limits, on a contract that will provide an annuity
for the employee's retirement. Transfer amounts from tax sheltered annuity plans
that are not subject to the Employee Retirement Income Security Act of 1974, as
amended, are accepted as premium payments, as permitted by law, under a
Contract. Other premium payments, including premium payments subject to IRC
Section 402(g), will not be accepted. Distributions of (1) salary reduction
contributions made in years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings on amounts held as of the last year
beginning before January 1, 1989, are not allowed prior to age 59 1/2,
separation from service, death or disability. Salary reduction contributions may
also be distributed upon hardship, but would generally be subject to penalties.
Distributions from a tax sheltered annuity are generally subject to a mandatory
20% federal income tax withholding. Certain death benefit provisions in the
Contract could be characterized as providing an incidental death benefit, the
amount of which is limited in any tax sheltered annuity. Individuals using the
Contract in connection with such plans should consult their tax advisors as
certain death benefit provisions may exceed this limitation. The Estate Enhancer
benefit is not currently available with a tax sheltered annuity.
41
OTHER INFORMATION
NOTICES AND ELECTIONS
You must send any changes, notices, and/or choices for your Contract to our
Service Center. These requests must be in writing and signed unless you have
submitted a telephone authorization form. If you have submitted an authorization
form, you may make the following choices via telephone:
1. Transfers
2. Premium allocation
3. Withdrawals, other than full surrenders
4. Requests to change the annuity date
We will use reasonable procedures to confirm that a telephone request is proper.
These procedures may include possible tape recording of telephone calls and
obtaining appropriate identification before effecting any telephone
transactions. We do not have any liability if we act on a request that we
reasonably believe is proper.
You should protect your personal identification number (PIN), because telephone
transactions will be available to anyone who provides your PIN. We may not be
able to verify that you are the person providing telephone instructions, or that
you have authorized any such person to act for you.
Telephone systems may not always be available. Any telephone system, whether it
is yours, your service provider's, your Financial Advisor's, or ours, can
experience outages or slowdowns for a variety of reasons. These outages or
slowdowns may delay or prevent our processing of your request. Although we have
taken precautions to help our systems handle heavy use, we cannot promise
reliability under all circumstances. If you are experiencing problems, you
should make your request by writing to our Service Center.
VOTING RIGHTS
We own all Fund shares held in the Account. As the owner, we have the right to
vote on any matter put to vote at any Funds' shareholder meetings. However, we
will vote all Fund shares attributable to Contracts by following instructions we
receive from you. If we don't receive voting instructions, we'll vote those
shares in the same proportion as shares for which we receive instructions. We
determine the number of shares you may give voting instructions on by dividing
your interest in a subaccount by the net asset value per share of the
corresponding Fund. We'll determine the number of shares you may give voting
instructions on as of a record date we choose. We may vote Fund shares in our
own right if laws change to permit us to do so.
You have voting rights until the annuity date. You may give voting instructions
concerning:
(1) the election of a Fund's Board of Directors;
(2) ratification of a Fund's independent accountant;
(3) approval of the investment advisory agreement for a Fund corresponding to
your selected subaccounts;
(4) any change in a fundamental investment policy of a Fund corresponding to
your selected subaccounts; and
(5) any other matter requiring a vote of the Fund's shareholders.
REPORTS TO CONTRACT OWNERS
At least once each contract year before the annuity date, we will send you
information about your Contract. It will outline all your Contract transactions
during the year, your Contract's current number of
42
accumulation units in each subaccount, the value of each accumulation unit of
each subaccount, and the contract value.
You will also receive an annual and a semi-annual report containing financial
statements and a list of portfolio securities of the Funds.
SELLING THE CONTRACT
MLPF&S is the principal underwriter of the Contract. Its principal business
address is 4 World Financial Center, New York, New York 10080. It was organized
in 1958 under the laws of the state of Delaware and is registered as a
broker-dealer under the Securities Exchange Act of 1934. It is a member of the
National Association of Securities Dealers, Inc. MLPF&S is an indirect wholly
owned subsidiary of Merrill Lynch & Co., Inc.
Registered representatives (Financial Advisors) of MLPF&S sell the Contract.
These Financial Advisors are registered with the NASD, licensed as insurance
agents in the states in which they do business, and appointed through various
Merrill Lynch Life Agencies as our insurance agents. Through a distribution
agreement we have with MLPF&S and companion sales agreements we have with the
Merrill Lynch Life Agencies, Merrill Lynch Life Agencies and/or MLPF&S
compensate the Financial Advisors. The maximum annual commission paid to a
Financial Advisor is 0.64% of contract value. In addition, on the annuity date,
the Financial Advisor will receive compensation of up to 1.50% of contract
value. Reduced compensation may be paid on Contracts purchased by our employees
or their spouses or dependents.
The maximum commission we will pay to the applicable insurance agency to be used
to pay commissions to Financial Advisors is 2.20% of contract value in the first
contract year and 1.10% of contract value for each successive contract year. In
addition, the maximum commission we will pay to the applicable insurance agency
on the annuity date is 2.40% of contract value.
MLPF&S may arrange for sales of the Contract by other broker-dealers. Registered
representatives of these other broker-dealers may be compensated on a different
basis than MLPF&S Financial Advisors; however, commissions paid to registered
representatives of these broker-dealers will not exceed those described above.
Selling firms may retain a portion of commissions. We pay commissions through
the registered broker-dealer, and may pay additional compensation to the
broker-dealer and/or reimburse it for a portion of expenses relating to sales of
the Contract. The registered representative may receive a portion of the expense
reimbursement allowance paid to the broker-dealer.
Registered representatives of MLPF&S are eligible for various cash benefits,
such as bonuses, insurance benefits and financing arrangements, and non-cash
compensation programs that MLPF&S offers, such as conferences, trips and awards.
Other payments may be made for services that do not directly involve the sale of
the Contracts. These services may include the recruitment and training of
personnel, production or promotional literature, and similar services.
We intend to recoup commissions and other sales expenses through fees and
charges imposed under the Contract. Commissions paid on the Contract, including
other incentives or payments, are not charged directly to the contract owners or
the Variable Account.
We offer the Contracts to the public on a continuous basis. We anticipate
continuing to offer the Contracts, but reserve the right to discontinue the
offering.
STATE REGULATION
We are subject to the laws of the State of Arkansas and to the regulations of
the Arkansas Insurance Department. We are also subject to the insurance laws and
regulations of all jurisdictions in which we're licensed to do business.
We file an annual statement with the insurance departments of jurisdictions
where we do business. The statement discloses our operations for the preceding
year and our financial condition as of the end of that year. Our books and
accounts are subject to insurance department review at all times. The Arkansas
43
Insurance Department, in conjunction with the National Association of Insurance
Commissioners, conducts a full examination of our operations periodically.
LEGAL PROCEEDINGS
There are no legal proceedings involving the Account. We and MLPF&S are engaged
in various kinds of routine litigation that, in our judgment, are not material
to our total assets.
EXPERTS
Deloitte & Touche LLP, independent auditors, have audited our financial
statements as of December 31, 2001 and 2000 and for each of the three years in
the period ended December 31, 2001. We include these financial statements in
reliance upon the reports of Deloitte & Touche LLP given upon their authority as
experts in accounting and auditing. Their principal business address is Two
World Financial Center, New York, New York 10281-1420.
LEGAL MATTERS
Our organization, our authority to issue the Contract, and the validity of the
form of the Contract have been passed upon by Barry G. Skolnick, our General
Counsel. Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice
on certain matters relating to federal securities laws.
REGISTRATION STATEMENTS
Registration Statements that relate to the Contract and its investment options
have been filed with the Securities and Exchange Commission under the Securities
Act of 1933 and the Investment Company Act of 1940. This Prospectus does not
contain all of the information in the registration statements. You can obtain
the omitted information from the Securities and Exchange Commission's principal
office in Washington, D.C., upon payment of a prescribed fee.
44
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The contents of the Statement of Additional Information for the Contract include
the following:
OTHER INFORMATION
Principal Underwriter
Financial Statements
Administrative Services Arrangements
CALCULATION OF YIELDS AND TOTAL RETURNS
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE INSURANCE COMPANY
45
APPENDIX A
EXAMPLE: The purpose of this example is to illustrate the operation of the
Maximum Anniversary Value GMDB. You pay an initial premium of $100,000 on
October 1, 2002 and a subsequent premium of $10,000 on April 1, 2004. You also
make a withdrawal of $50,000 on May 1, 2004. Your death benefit, based on
HYPOTHETICAL Contract values and transactions, and resulting hypothetical
maximum anniversary values ("MAV"), are illustrated below. This example assumes
hypothetical positive and negative investment performance of the Account, as
indicated, to demonstrate the calculation of the death benefit value. There is,
of course, no assurance that the Account will experience positive investment
performance. The example does not reflect the deduction of fees and charges. FOR
A DETAILED EXPLANATION OF HOW WE CALCULATE THE DEATH BENEFIT, SEE "DEATH
BENEFIT."
(A) (B) (C)
--------- ------------ --------
TRANSACTIONS PREMS MAX
----------------- LESS ADJ. ANNIV. VALUE CONTRACT
DATE PREM. WITHDR. WITHDRWS. (MAV) VALUE
---- ------- ------- --------- ------------ --------
10/01/02 THE CONTRACT IS ISSUED 100,000 100,000 0 100,000
MAV is $0 until first contract anniversary
10/01/03 FIRST CONTRACT ANNIVERSARY 100,000 110,000 110,000
Assume contract value increased by $10,000 due to positive
investment performance
Anniversary value for 10/1/2003 = Contract value on
10/1/2003 = $110,000
MAV = greatest of anniversary values = $110,000
04/01/04 OWNER PUTS IN $10,000 ADDITIONAL PREMIUM 10,000 110,000 120,000 114,000
Assume contract value decreased by $6,000 due to negative
investment performance
Anniversary value for 10/1/2003 = contract value on
10/1/2003 + premiums added since that anniversary = $110,000
+ $10,000 = $120,000
MAV = greatest of anniversary values = $120,000
05/01/04 OWNER TAKES A $50,000 WITHDRAWAL 50,000 50,000 60,000 50,000
Assume contract value decreased by $14,000 due to negative
investment performance
Anniversary value for 10/1/2003 = contract value on
10/1/2003 + premiums added - adjusted withdrawals since that
anniversary = $110,000 + $10,000 - $60,000 = $60,000
Adjusted withdrawal = withdrawal X maximum (MAV, prems -
adj. withdrs.) / contract value
= 50,000 maximum (120,000, 110,000) / 100,000
= $50,000 x 120,000 / 100,000 = $60,000
(Note: all values are determined immediately prior to the
withdrawal)
MAV = greatest of anniversary values = $60,000
10/01/04 SECOND CONTRACT ANNIVERSARY 50,000 60,000 55,000
Assume contract value increased by $5,000 due to positive
investment performance
Anniversary value for 10/1/2003 = $60,000
Anniversary value for 10/1/2004 = contract value on
10/1/2004 = $55,000
MAV = greatest of anniversary values = maximum ($60,000,
$55,000) = $60,000
10/01/05 THIRD CONTRACT ANNIVERSARY 50,000 65,000 65,000
Assume contract value increased by $10,000 due to positive
investment performance
Anniversary value for 10/1/2003 = $60,000
Anniversary value for 10/1/2004 = contract value on
10/1/2004 = $55,000
Anniversary value for 10/1/2005 = contract value on
10/1/2005 = $65,000
MAV = greatest of anniversary values = maximum ($60,000,
$55,000, $65,000) = $65,000
DATE DEATH BENEFIT
---- --------------------------------
10/01/02 100,000 maximum of (A), (B), (C)
10/01/03 110,000 maximum of (A), (B), (C)
04/01/04 120,000 maximum of (A), (B), (C)
05/01/04 60,000 maximum of (A), (B), (C)
10/01/04 60,000 maximum of (A), (B), (C)
10/01/05 65,000 maximum of (A), (B), (C)
A-1
APPENDIX B
THE PURPOSE OF THIS EXAMPLE IS TO ILLUSTRATE THE OPERATION OF THE PREMIUMS
COMPOUNDED AT 5% GUARANTEED MINIMUM DEATH BENEFIT, IN PARTICULAR, THE
CALCULATION OF "ADJUSTED" WITHDRAWALS. THE INVESTMENT RETURNS SHOWN ARE
HYPOTHETICAL AND ARE NOT REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE. ACTUAL
INVESTMENT RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A
NUMBER OF FACTS, INCLUDING INVESTMENT ALLOCATIONS MADE BY A CONTRACT OWNER AND
THE INVESTMENT EXPERIENCE OF THE FUNDS. THE EXAMPLE DOES NOT REFLECT THE
DEDUCTION OF FEES AND CHARGES.
EXAMPLE: Assume a 65 year-old person purchases a Contract on September 1, 2002
with the Premiums Compounded at 5% guaranteed minimum death benefit and makes an
initial payment of $100,000. The following chart depicts the impact of both
withdrawals and investment performance on the death benefit at certain points
over the life of the contract owner.
TRANSACTIONS CONTRACT PREM. COMP.
----------------- ADJ. VALUE AT 5%
DATE PREM. WITHDR. WITHDR. (CV) (GMDB)
---- ------- ------- ------- -------- -----------
9/1/02 THE CONTRACT IS ISSUED 100,000 100,000 100,000
9/1/03 FIRST CONTRACT ANNIVERSARY 103,500 105,000
Assume contract value increased by $3,500 due to positive
investment performance.
1/1/04 OWNER TAKES A $5,250 WITHDRAWAL* 5,250 5,082 96,250 101,644
Assume contract value decreased by $2,000 due to negative
investment performance.
Is withdrawal equal to or less than 5% of GMDB as of 9/1/03?
$5,250 <= 5% of $105,000 = $5,250
Adjusted withdrawal = withdrawal discounted for the number
of days until the next contract anniversary at
5% = $5,250/(1.05( 7/8)(243/365)) = $5,082
GMDB as of 1/1/04 = GMDB as of 9/1/03 compounded at 5%
interest for the number of days since the last anniversary
less adjusted withdrawals = $105,000 X 1.05( 7/8)(122/365) -
Adj. withdr. = $106,726 - $5,082 = $101,644
This means that as long as withdrawals during the contract
year do not exceed 5% of the last anniversary GMDB they will
be adjusted as of the current date so that they will
effectively reduce the next anniversary GMDB dollar for
dollar. (see 9/1/2004 below)
9/1/04 SECOND CONTRACT ANNIVERSARY
Assume contract value increased by $5,000 due to positive 101,250 105,000
investment performance
GMDB as of 9/1/04 = GMDB as of 9/1/03 compounded at 5%
interest less the adjusted withdrawal as of 1/1/04
compounded at 5% interest for the number
of days since the withdrawal
= 9/1/03 GMDB X 1.05 - adj. withdrawal X 1.05( 7/8)(243/365)
= $105,000 X 1.05 -
$5,082 X 1.05 ( 7/8)(243/365) = $110,250 - $5,250 =
$105,000
Note that $5,250 withdrawal as of 1/1/04 reduces the
9/1/2004 GMDB dollar for dollar.
* IF INSTEAD THE OWNER TOOK A WITHDRAWAL OF $10,000 AS OF 10,000 10,515 91,500 96,211
1/1/2004 THEN:
Is withdrawal equal to or less than 5% of GMDB as of 9/1/03?
5% of $105,000 = $5,250
Since the withdrawal exceeds 5% of the last anniversary
GMDB, the withdrawal will be adjusted so that it
proportionally reduces the GMDB
Adjusted withdrawal = withdrawal X GMDB/CV (where all values
are determined immediately prior to the withdrawal) = 10,000
X $106,726/101,500 = 10,515
GMDB = $105,000 X 1.05( 7/8)(122/365) - Adj. withdr. =
$106,726 - $10,515 = $96,211
DEATH BENEFIT
(GREATER OF
CV AND
DATE GMDB)
---- -------------
9/1/02 100,000
9/1/03 105,000
1/1/04 101,644
9/1/04
105,000
* 96,211
B-1
APPENDIX C
THE PURPOSE OF THIS EXAMPLE IS TO ILLUSTRATE THE OPERATION OF THE ESTATE
ENHANCER BENEFIT. THE INVESTMENT RETURNS ASSUMED ARE HYPOTHETICAL AND ARE NOT
REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE. ACTUAL INVESTMENT RETURNS MAY BE
MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS MADE BY A CONTRACT OWNER AND THE INVESTMENT
EXPERIENCE OF THE FUNDS. THE EXAMPLE ASSUMES NO WITHDRAWALS AND DOES NOT REFLECT
THE DEDUCTION OF ANY FEES AND CHARGES OR ANY CONTRACT VALUE CREDITS.
FACTS: Assume that a couple (ages 60 and 55) purchases a Contract on October 1,
2002 with the Estate Enhancer benefit, and makes an initial premium payment of
$100,000. The Contract value as of receipt of due proof of death of the first to
die is $300,000. The following chart depicts the potential Estate Enhancer
benefit at the death of the contract owner.
Net Premiums................................................ $100,000
Contract Value.............................................. 300,000
Estate Enhancer Gain........................................ 200,000
Estate Enhancer benefit
Lesser of 45% of Estate Enhancer Gain ($90,000) or 45% of
Net Premiums ($45,000).................................... 45,000
* Assuming the contract value is greater than the GMDB, the total death benefit
payable equals $300,000 + $45,000 = $345,000. Assuming a lump sum payout and
an income tax rate of 36%, the after-tax death benefit is $256,800.
If instead, the couple had been ages 70 and 55, the percentage used in the above
calculations would have been 30% since the oldest owner at issue was over age 69
and the Estate Enhancer benefit would have been $30,000.
FOR A DETAILED EXPLANATION OF HOW WE CALCULATE THE ESTATE ENHANCER BENEFIT, SEE
"DEATH BENEFIT."
C-1
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 2002
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
MERRILL LYNCH LIFE INSURANCE COMPANY
HOME OFFICE: LITTLE ROCK, ARKANSAS 72201
SERVICE CENTER: P.O. BOX 44222
JACKSONVILLE, FLORIDA 32231-4222
4804 DEER LAKE DRIVE EAST
JACKSONVILLE, FLORIDA 32246
PHONE: (800) 535-5549
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
This individual deferred variable annuity contract (the "Contract") is designed
to provide comprehensive and flexible ways to invest and to create a source of
income protection for later in life through the payment of annuity benefits. An
annuity is intended to be a long term investment. Contract owners should
consider their need for deferred income before purchasing the Contract. The
Contract is issued by Merrill Lynch Life Insurance Company ("Merrill Lynch
Life") both on a nonqualified basis, and as an Individual Retirement Annuity
("IRA") that is given qualified tax status. The Contract may also be purchased
through an established IRA or Roth IRA custodial account with Merrill Lynch,
Pierce, Fenner & Smith Incorporated. Transfer amounts from tax sheltered annuity
plans that are not subject to the Employee Retirement Income Security Act of
1974, as amended, will be accepted as premium payments, as permitted by law.
Other premium payments will not be accepted under a Contract used as a tax
sheltered annuity.
This Statement of Additional Information is not a Prospectus and should be read
together with the Contract's Prospectus dated July 1, 2002, which is available
on request and without charge by writing to or calling Merrill Lynch Life at the
Service Center address or phone number set forth above.
TABLE OF CONTENTS
PAGE
----
OTHER INFORMATION........................................... 3
Principal Underwriter....................................... 3
Financial Statements........................................ 3
Administrative Services Arrangements........................ 3
CALCULATION OF YIELDS AND TOTAL RETURNS..................... 3
Money Market Yields......................................... 3
Other Subaccount Yields..................................... 4
Total Returns............................................... 5
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE INSURANCE
COMPANY................................................... G-1
2
OTHER INFORMATION
PRINCIPAL UNDERWRITER
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of
Merrill Lynch Life, performs all sales and distribution functions regarding the
Contracts and may be deemed the principal underwriter of Merrill Lynch Life
Variable Annuity Separate Account C (the "Account") under the Investment Company
Act of 1940. The offering is continuous. MLPF&S has not received any payments or
commissions in connection with the sale of the Contracts in the past three
years.
FINANCIAL STATEMENTS
The financial statements of Merrill Lynch Life included in this Statement of
Additional Information should be distinguished from the financial statements of
the Account and should be considered only as bearing upon the ability of Merrill
Lynch Life to meet any obligations it may have under the Contract.
ADMINISTRATIVE SERVICES ARRANGEMENTS
Merrill Lynch Life has entered into a Service Agreement with its parent, Merrill
Lynch Insurance Group, Inc. ("MLIG") pursuant to which Merrill Lynch Life can
arrange for MLIG to provide directly or through affiliates certain services.
Pursuant to this agreement, Merrill Lynch Life has arranged for MLIG to provide
administrative services for the Account and the Contracts, and MLIG, in turn,
has arranged for a subsidiary, Merrill Lynch Insurance Group Services, Inc.
("MLIG Services"), to provide these services. Compensation for these services,
which will be paid by Merrill Lynch Life, will be based on the charges and
expenses incurred by MLIG Services, and will reflect MLIG Services' actual
costs. Merrill Lynch Life has not paid any administrative services fees in
connection with the Account or the Contracts in the past three years.
CALCULATION OF YIELDS AND TOTAL RETURNS
MONEY MARKET YIELD
From time to time, Merrill Lynch Life may quote in advertisements and sales
literature the current annualized yield for the Domestic Money Market V.I.
Subaccount for a 7-day period in a manner that does not take into consideration
any realized or unrealized gains or losses on shares of the underlying Funds or
on their respective portfolio securities. The current annualized yield is
computed by: (a) determining the net change (exclusive of realized gains and
losses on the sales of securities and unrealized appreciation and depreciation)
at the end of the 7-day period in the value of a hypothetical account under a
Contract having a balance of 1 unit at the beginning of the period, (b) dividing
such net change in account value by the value of the account at the beginning of
the period to determine the base period return; and (c) annualizing this
quotient on a 365-day basis. The net change in account value reflects: (1) net
income from the Fund attributable to the hypothetical account; and (2) charges
and deductions imposed under the Contract which are attributable to the
hypothetical account. The charges and deductions include the per unit charges
for the hypothetical account for: (1) the asset-based insurance charge; and (2)
the annual contract fee. For purposes of calculating current yield for a
Contract, an average per unit contract fee is used. Based on our current
estimates of average contract size and withdrawals, we have assumed the average
per unit contract fee to be 0.00%. Current yield will be calculated according to
the following formula:
Current Yield = ((NCF - ES)/UV) X (365/7)
3
Where:
NCF = the net change in the value of the Fund (exclusive of
realized gains and losses on the sale of securities and
unrealized appreciation and depreciation) for the 7-day
period attributable to a hypothetical account having a
balance of 1 unit.
ES = per unit expenses for the hypothetical account for the 7-day
period.
UV = the unit value on the first day of the 7-day period.
Merrill Lynch Life also may quote the effective yield of the Domestic Money
Market V.I. Subaccount for the same 7-day period, determined on a compounded
basis. The effective yield is calculated by compounding the unannualized base
period return according to the following formula:
Effective Yield = (1 + ((NCF - ES)/UV))(365/7) - 1
Where:
NCF = the net change in the value of the Fund (exclusive of
realized gains and losses on the sale of securities and
unrealized appreciation and depreciation) for the 7-day
period attributable to a hypothetical account having a
balance of 1 unit.
ES = per unit expenses of the hypothetical account for the 7-day
period.
UV = the unit value for the first day of the 7-day period.
Because of the charges and deductions imposed under the Contract, the yield for
the Domestic Money Market V.I. Subaccount will be lower than the yield for the
corresponding underlying Fund.
The yields on amounts held in the Domestic Money Market V.I. Subaccount normally
will fluctuate on a daily basis. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates of
return. The actual yield for the subaccount is affected by changes in interest
rates on money market securities, average portfolio maturity of the underlying
Fund, the types and qualities of portfolio securities held by the Fund and the
Fund's operating expenses. Yields on amounts held in the Domestic Money Market
V.I. Subaccount may also be presented for periods other than a 7-day period.
OTHER SUBACCOUNT YIELDS
From time to time, Merrill Lynch Life may quote in sales literature or
advertisements the current annualized yield of one or more of the subaccounts
(other than the Domestic Money Market V.I. Subaccount) for a Contract for a
30-day or one-month period. The annualized yield of a subaccount refers to
income generated by the subaccount over a specified 30-day or one-month period.
Because the yield is annualized, the yield generated by the subaccount during
the 30-day or one-month period is assumed to be generated each period over a
12-month period. The yield is computed by: (1) dividing the net investment
income of the Fund attributable to the subaccount units less subaccount expenses
for the period; by (2) the maximum offering price per unit on the last day of
the period times the daily average number of units outstanding for the period;
then (3) compounding that yield for a 6-month period; and then (4) multiplying
that result by 2. Expenses attributable to the subaccount include the
asset-based insurance charge and the annual contract fee. For purposes of
calculating the 30-day or one-month yield, an average contract fee per dollar of
contract value in the subaccount is used to determine the amount of the charge
attributable to the subaccount for the 30-day or one-month period. Based on our
current estimates of average contract size and withdrawals, we have assumed the
average contract fee to be 0.00%. The 30-day or one-month yield is calculated
according to the following formula:
6
Yield = 2 X ((((NI - ES)/(U X UV)) + 1) - 1)
4
Where:
NI = net investment income of the Fund for the 30-day or
one-month period attributable to the subaccount's units.
ES = expenses of the subaccount for the 30-day or one-month
period.
U = the average number of units outstanding.
UV = the unit value at the close of the last day in the 30-day or
one-month
Currently, Merrill Lynch Life may quote yields on bond subaccounts. Because of
the charges and deductions imposed under the Contracts, the yield for a
subaccount will be lower than the yield for the corresponding Fund.
The yield on the amounts held in the subaccounts normally will fluctuate over
time. Therefore, the disclosed yield for any given past period is not an
indication or representation of future yields or rates of return. A subaccount's
actual yield is affected by the types and quality of portfolio securities held
by the corresponding Fund, and its operating expenses.
TOTAL RETURNS
From time to time, Merrill Lynch Life also may quote in sales literature or
advertisements, total returns, including average annual total returns for one or
more of the subaccounts for various periods of time. Average annual total
returns will be provided for a subaccount for 1, 5 and 10 years, or for a
shorter period, if applicable.
Total returns assume the Contract was surrendered at the end of the period
shown, and are not indicative of performance if the Contract was continued for a
longer period. The Contract does not impose any surrender charge.
Average annual total returns for other periods of time may also be disclosed
from time to time. For example, average annual total returns may be provided
based on the assumption that a subaccount had been in existence and had invested
in the corresponding underlying Fund for the same period as the corresponding
Fund had been in operation. The Funds commenced operations as indicated below:
FUND COMMENCED OPERATIONS
---- --------------------
ML Domestic Money Market V.I. Fund February 21, 1992
Roszel/Lord Abbett Large Cap Value Portfolio July 1, 2002
Roszel/Levin Large Cap Value Portfolio July 1, 2002
Roszel/MLIM Relative Value Portfolio July 1, 2002
Roszel/Sound Large Cap Core Portfolio July 1, 2002
Roszel/INVESCO-NAM Large Cap Core Portfolio July 1, 2002
Roszel/Nicholas-Applegate Large Cap Growth Portfolio July 1, 2002
Roszel/Rittenhouse Large Cap Growth Portfolio July 1, 2002
Roszel/Seneca Large Cap Growth Portfolio July 1, 2002
Roszel/Valenzuela Mid Cap Value Portfolio July 1, 2002
Roszel/Seneca Mid Cap Growth Portfolio July 1, 2002
Roszel/NWQ Small Cap Value Portfolio July 1, 2002
Roszel/Neuberger Berman Small Cap Growth Portfolio July 1, 2002
Roszel/Lazard International Portfolio July 1, 2002
Roszel/Credit Suisse International Portfolio July 1, 2002
Roszel/Lord Abbett Government Securities Portfolio July 1, 2002
Roszel/MLIM Fixed-Income Portfolio July 1, 2002
5
Average annual total returns represent the average annual compounded rates of
return that would equate an initial investment of $1,000 under a Contract to the
redemption value or that investment as of the last day of each of the periods.
The ending date for each period for which total return quotations are provided
will generally be as of the most recent calendar quarter-end.
Average annual total returns are calculated using subaccount unit values
calculated on each valuation day based on the performance of the corresponding
underlying Fund, the deductions for the asset-based insurance charge and the
contract fee, and assume a surrender of the Contract at the end of the period
for the return quotation (although the Contract does not impose a surrender
charge). For purposes of calculating total return, an average per dollar
contract fee attributable to the hypothetical account for the period is used.
Based on our current estimates of average contract size and withdrawals, we have
assumed the average contract fee to be 0.00%. The average annual total return is
then calculated according to the following formula:
TR = ((ERV/P)(1/N)) -- 1
Where:
TR = the average annual total return net of subaccount recurring
charges (such as the asset-based insurance charge and
contract fee).
ERV = the ending redeemable value at the end of the period of the
hypothetical account with an initial payment of $1,000.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
From time to time, Merrill Lynch Life also may quote in sales literature or
advertisements total returns for other periods.
From time to time, Merrill Lynch Life also may quote in sales literature or
advertisements total returns or other performance information for a hypothetical
Contract assuming the initial premium is allocated to more than one subaccount
or assuming monthly transfers from a specified subaccount to one or more
designated subaccounts under a dollar cost averaging program. Merrill Lynch Life
also may quote in sales literature or advertisements total returns or other
performance information for a hypothetical Contract assuming participation in an
asset allocation or rebalancing program. These returns will reflect the
performance of the affected subaccount(s) for the amount and duration of the
allocation to each subaccount for the hypothetical Contract. They also will
reflect the deduction of the charges described above. For example, total return
information for a Contract with a dollar cost averaging program for a 12-month
period will assume commencement of the program at the beginning of the most
recent 12-month period for which average annual total return information is
available. This information will assume an initial lump-sum investment in a
specified subaccount (the "DCA subaccount") at the beginning of that period and
monthly transfers of a portion of the contract value from the DCA subaccount to
designated other subaccount(s) during the 12-month period. The total return for
the Contract for this 12-month period therefore will reflect the return on the
portion of the contract value that remains invested in the DCA subaccount for
the period it is assumed to be so invested, as affected by monthly transfers,
and the return on amounts transferred to the designated other subaccounts for
the period during which those amounts are assumed to be invested in those
subaccounts. The return for an amount invested in a subaccount will be based on
the performance of that subaccount for the duration of the investment, and will
reflect the charges described above. Performance information for a dollar
cost-averaging program also may show the returns for various periods for a
designated subaccount assuming monthly transfers to the subaccount, and may
compare those returns to returns assuming an initial lump-sum investment in that
subaccount. This information also may be compared to various indices, such as
the Merrill Lynch 91-day Treasury Bills index or the U.S. Treasury Bills index
and may be illustrated by graphs, charts, or otherwise.
6
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying balance sheets of Merrill Lynch Life Insurance
Company (the "Company"), a wholly owned subsidiary of Merrill Lynch Insurance
Group, Inc., as of December 31, 2001 and 2000, and the related statements of
earnings, comprehensive income, stockholder's equity, and cash flows for each of
the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2001 and
2000, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche, LLP
New York, New York
February 25, 2002
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
(Dollars in thousands, except common stock par value and shares)
================================================================================
ASSETS 2001 2000
------ ---- ----
INVESTMENTS:
Fixed maturity securities, at estimated fair value
(amortized cost: 2001 - $2,009,129; 2000 - $2,050,333) $ 2,007,123 $ 2,012,016
Equity securities, at estimated fair value
(cost: 2001 - $167,959; 2000 - $218,632) 163,701 204,617
Trading account securities, at estimated fair value 23,636 24,859
Real estate held-for-sale 19,447 19,447
Limited partnerships, at cost 11,270 10,413
Policy loans on insurance contracts 1,194,478 1,193,690
------------------ -----------------
Total Investments 3,419,655 3,465,042
CASH AND CASH EQUIVALENTS 130,429 92,730
ACCRUED INVESTMENT INCOME 69,884 71,001
DEFERRED POLICY ACQUISITION COSTS 470,938 494,088
FEDERAL INCOME TAXES - DEFERRED - 10,902
REINSURANCE RECEIVABLES 9,428 3,090
AFFILIATED RECEIVABLES - NET - 667
RECEIVABLES FROM SECURITIES SOLD 2,317 2,578
OTHER ASSETS 41,912 40,614
SEPARATE ACCOUNTS ASSETS 11,305,453 12,362,798
------------------ -----------------
TOTAL ASSETS $ 15,450,016 $ 16,543,510
================== =================
See accompanying notes to financial statements.
================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY 2001 2000
------------------------------------ ---- ----
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 3,255,791 $ 3,421,873
Claims and claims settlement expenses 95,020 85,673
------------------ -----------------
Total policyholder liabilities and accruals 3,350,811 3,507,546
OTHER POLICYHOLDER FUNDS 14,239 17,678
LIABILITY FOR GUARANTY FUND ASSESSMENTS 8,449 10,250
FEDERAL INCOME TAXES - DEFERRED 13,931 -
FEDERAL INCOME TAXES - CURRENT 5,522 5,134
PAYABLES FOR SECURITIES PURCHASED 29,795 1,328
AFFILIATED PAYABLES - NET 3,736 -
UNEARNED POLICY CHARGE REVENUE 113,676 101,182
OTHER LIABILITIES 7,594 32,074
SEPARATE ACCOUNTS LIABILITIES 11,298,821 12,356,035
------------------ -----------------
Total Liabilities 14,846,574 16,031,227
------------------ -----------------
STOCKHOLDER'S EQUITY:
Common stock ($10 par value; authorized: 1,000,000 shares; issued and
outstanding: 250,000 shares) 2,500 2,500
Additional paid-in capital 347,324 347,324
Retained earnings 273,046 194,808
Accumulated other comprehensive loss (19,428) (32,349)
------------------ -----------------
Total Stockholder's Equity 603,442 512,283
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 15,450,016 $ 16,543,510
================== =================
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in thousands)
================================================================================
2001 2000 1999
---- ---- ----
REVENUES:
Policy charge revenue $ 253,837 $ 268,252 $ 233,029
Net investment income 221,872 239,173 253,835
Net realized investment gains (losses) (13,844) 59 8,875
------------- ------------- --------------
Total Revenues 461,865 507,484 495,739
------------- ------------- --------------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 153,111 164,216 175,839
Market value adjustment expense 2,296 481 2,400
Policy benefits (net of reinsurance recoveries: 2001 - $16,562;
2000 - $14,594; 1999 - $14,175) 37,773 21,616 32,983
Reinsurance premium ceded 24,535 23,913 21,691
Amortization of deferred policy acquisition costs 59,335 53,523 65,607
Insurance expenses and taxes 65,700 57,592 53,377
------------- ------------- --------------
Total Benefits and Expenses 342,750 321,341 351,897
------------- ------------- --------------
Earnings Before Federal Income Tax Provision 119,115 186,143 143,842
------------- ------------- --------------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 23,002 43,531 48,846
Deferred 17,875 16,931 (1,135)
------------- ------------- --------------
Total Federal Income Tax Provision 40,877 60,462 47,711
------------- ------------- --------------
NET EARNINGS $ 78,238 $ 125,681 $ 96,131
============= ============= ==============
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in thousands)
================================================================================
2001 2000 1999
---- ---- ----
NET EARNINGS $ 78,238 $ 125,681 $ 96,131
------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during the period 31,567 64,027 (143,202)
Reclassification adjustment for (gains) losses included in net earnings 13,361 428 (8,347)
------------- ------------- -------------
Net unrealized gains (losses) on investment securities 44,928 64,455 (151,549)
Adjustments for:
Policyholder liabilities (9,498) (13,859) 31,959
Deferred policy acquisition costs (15,551) (23,310) 42,890
Deferred federal income taxes (6,958) (9,550) 26,845
------------- ------------- -------------
Total other comprehensive income (loss), net of tax 12,921 17,736 (49,855)
------------- ------------- -------------
COMPREHENSIVE INCOME $ 91,159 $ 143,417 $ 46,276
============= ============= =============
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in thousands, except common stock par value and shares)
================================================================================
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholder's
stock capital earnings loss equity
----------- ------------- ------------ ----------------- --------------
BALANCE, JANUARY 1, 1999 $ 2,000 $ 347,324 $ 173,496 $ (230) $ 522,590
Stock dividend paid to parent
($10 par value, 50,000 shares) 500 (500) -
Cash dividend paid to parent (135,000) (135,000)
Net earnings 96,131 96,131
Other comprehensive loss, net of tax (49,855) (49,855)
----------- ------------- ------------ ----------------- --------------
BALANCE, DECEMBER 31, 1999 2,500 347,324 134,127 (50,085) 433,866
Cash dividend paid to parent (65,000) (65,000)
Net earnings 125,681 125,681
Other comprehensive income, net of tax 17,736 17,736
----------- ------------- ------------ ----------------- --------------
BALANCE, DECEMBER 31, 2000 2,500 347,324 194,808 (32,349) 512,283
Net earnings 78,238 78,238
Other comprehensive income, net of tax 12,921 12,921
----------- ------------- ------------ ----------------- --------------
BALANCE, DECEMBER 31, 2001 $ 2,500 $ 347,324 $ 273,046 $ (19,428) $ 603,442
=========== ============= ============ ================= ==============
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in thousands)
================================================================================
2001 2000 1999
---- ---- ----
Cash Flows From Operating Activities:
Net earnings $ 78,238 $ 125,681 $ 96,131
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 59,335 53,523 65,607
Capitalization of policy acquisition costs (51,736) (95,006) (92,992)
Accretion of investments (1,033) (1,338) (1,649)
Interest credited to policyholders' account balances 153,111 164,216 175,839
Provision (benefit) for deferred Federal income tax 17,875 16,931 (1,135)
(Increase) decrease in operating assets:
Accrued investment income 1,117 2,166 292
Reinsurance receivables (6,338) 1,104 (1,301)
Affiliated receivables 667 (380) (287)
Other (1,298) 6,827 (929)
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 9,347 (23) 21,771
Other policyholder funds (3,439) (7,417) 4,293
Liability for guaranty fund assessments (1,801) (4,639) 1,025
Federal income taxes - current 388 (7,672) (3,034)
Affiliated payables 3,736 - (822)
Unearned policy charge revenue 12,494 23,519 22,428
Other (24,695) 6,206 1,595
Other operating activities:
Net realized investment (gains) losses (excluding losses on cash and
cash equivalents) 13,844 (60) (8,892)
---------------- ---------------- ----------------
Net cash and cash equivalents provided by operating activities 259,812 283,638 277,940
---------------- ---------------- ----------------
Cash Flow From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 279,420 143,373 595,836
Maturities of available-for-sale securities 342,148 260,953 378,914
Purchases of available-for-sale securities (512,979) (243,292) (748,436)
Trading account securities (214) (372) (154)
Sales of real estate held-for-sale - 1,375 13,282
Policy loans on insurance contracts (788) (34,527) (19,707)
Recapture of investment in separate accounts - 665 12,267
Investment in separate accounts (1,009) (2,195) (5,381)
---------------- ---------------- ----------------
Net cash and cash equivalents provided by investing activities 106,578 125,980 226,621
---------------- ---------------- ----------------
See accompanying notes to financial statements. (Continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Continued)(Dollars in thousands)
================================================================================
2001 2000 1999
---- ---- ----
Cash Flows from Financing Activities:
Proceeds from (payments for):
Dividends paid to parent $ - $ (65,000) $ (135,000)
Policyholder deposits 1,090,788 1,469,839 1,196,120
Policyholder withdrawals (including transfers to/from separate accounts) (1,419,479) (1,813,908) (1,568,877)
--------------- --------------- --------------
Net cash and cash equivalents used by financing activities (328,691) (409,069) (507,757)
--------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,699 549 (3,196)
CASH AND CASH EQUIVALENTS
Beginning of year 92,730 92,181 95,377
--------------- --------------- --------------
End of year $ 130,429 $ 92,730 $ 92,181
=============== =============== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal income taxes $ 22,614 $ 51,203 $ 51,880
Interest 639 850 688
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
================================================================================
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Merrill Lynch Life Insurance Company (the "Company") is
a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc. ("MLIG"). The
Company is an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch & Co."). The Company is domiciled in the State of Arkansas.
The Company sells non-participating life insurance and annuity products
including variable life insurance, variable annuities, market value adjusted
annuities and immediate annuities. During 2001, the Company discontinued
manufacturing and marketing estate planning life insurance products. The Company
is currently licensed to sell insurance and annuities in forty-nine states, the
District of Columbia, Puerto Rico, the U.S. Virgin Islands and Guam. The Company
markets its products solely through the retail network of Merrill Lynch, Pierce,
Fenner & Smith, Incorporated ("MLPF&S"), a wholly owned broker-dealer subsidiary
of Merrill Lynch & Co.
BASIS OF REPORTING: The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and prevailing industry practices, both of which require management to
make estimates that affect the reported amounts and disclosure of contingencies
in the financial statements. Actual results could differ from those estimates.
The significant accounting policies and related judgements underlying the
Company's financial statements are summarized below. In applying these policies,
management makes subjective and complex judgements that frequently require
estimates about matters that are inherently uncertain. Many of these policies
are common in the insurance industry; others are specific to the Company's
business and operations.
For the purpose of reporting cashflows, cash and cash equivalents include cash
on hand and on deposit and short-term investments with original maturities of
three months or less.
To facilitate comparisons with the current year, certain amounts in the prior
years have been reclassified.
REVENUE RECOGNITION: Revenues for variable annuity contracts consist of policy
charges for mortality and expense risks, administration fees, and annual
contract maintenance charges, as well as withdrawal charges assessed on
contracts surrendered during the withdrawal charge period.
Revenues for variable life insurance contracts consist of policy charges for
mortality and expense risks, cost of insurance fees, and amortization of
front-end and deferred sales charges, as well as withdrawal charges assessed on
contracts surrendered during the withdrawal charge period.
Revenues for interest-sensitive annuity contracts (market value adjusted
annuities and immediate annuities) and interest-sensitive life insurance
contracts (single premium whole life insurance - not currently marketed) consist
of investment income and withdrawal charges assessed on contracts surrendered
during the withdrawal charge period.
INVESTMENTS: The Company's investments in debt and equity securities are
classified as either available-for-sale or trading and are reported at estimated
fair value. Unrealized gains and losses on available-for-sale securities are
included in stockholder's equity as a component of accumulated other
comprehensive loss, net of tax. Unrealized gains and losses on trading account
securities are included in net realized investment gains (losses). If management
determines that a decline in the value of a security is other-than-temporary,
based on the review of
current market conditions and credit quality, the carrying value is adjusted to
estimated fair value and the decline in value is recorded as a net realized
investment loss.
For fixed maturity securities, premiums are amortized to the earlier of the call
or maturity date, discounts are accreted to the maturity date, and interest
income is accrued daily. For equity securities, dividends are recognized on the
dividend declaration date. Realized gains and losses on the sale or maturity of
investments are determined on the basis of specific identification. Investment
transactions are recorded on the trade date.
Certain fixed maturity securities are considered non-investment grade. The
Company defines non-investment grade fixed maturity securities as unsecured debt
obligations that do not have a rating equivalent to Standard and Poor's (or
similar rating agency) BBB- or higher.
Real estate held-for-sale is stated at estimated fair value less estimated
selling costs.
Policy loans on insurance contracts are stated at unpaid principal balances.
Investments in limited partnerships are carried at cost.
DEFERRED POLICY ACQUISITION COSTS: Policy acquisition costs for life and annuity
contracts are deferred and amortized based on the estimated future gross profits
for each group of contracts. These future gross profit estimates are subject to
periodic evaluation by the Company, with necessary revisions applied against
amortization to date. The impact of these revisions on cumulative amortization
is recorded as a charge or credit to current operations. It is reasonably
possible that estimates of future gross profits could be reduced in the future,
resulting in a material reduction in the carrying amount of deferred policy
acquisition costs.
Policy acquisition costs are principally commissions and a portion of certain
other expenses relating to policy acquisition, underwriting and issuance that
are primarily related to and vary with the production of new business. Insurance
expenses and taxes reported in the statements of earnings are net of amounts
deferred. Policy acquisition costs can also arise from the acquisition or
reinsurance of existing inforce policies from other insurers. These costs
include ceding commissions and professional fees related to the reinsurance
assumed. The deferred costs are amortized in proportion to the estimated future
gross profits over the anticipated life of the acquired insurance contracts
utilizing an interest methodology.
During 1990, the Company entered into an assumption reinsurance agreement with
an unaffiliated insurer. The acquisition costs relating to this agreement are
being amortized over a twenty-five year period using an effective interest rate
of 7.5%. This reinsurance agreement provided for payment of contingent ceding
commissions, for a ten year period, based upon the persistency and mortality
experience of the insurance contracts assumed. Any payments made for the
contingent ceding commissions were capitalized and amortized using an identical
methodology as that used for the initial acquisition costs. The following is a
reconciliation of the acquisition costs related to the reinsurance agreement for
the years ended December 31:
2001 2000 1999
---- ---- ----
Beginning balance $ 105,503 $ 102,074 $ 101,793
Capitalized amounts 147 10,891 11,759
Interest accrued 7,913 7,656 7,634
Amortization (17,694) (15,118) (19,112)
---------------- ---------------- ----------------
Ending balance $ 95,869 $ 105,503 $ 102,074
================ ================ ================
The following table presents the expected amortization, net of interest accrued,
of these deferred acquisition costs over the next five years. The amortization
may be adjusted based on periodic evaluation of the expected gross profits on
the reinsured policies.
2002 $ 5,043
2003 $ 5,169
2004 $ 5,506
2005 $ 5,910
2006 $ 6,810
SEPARATE ACCOUNTS: Separate Accounts are established in conformity with Arkansas
State Insurance law and are generally not chargeable with liabilities that arise
from any other business of the Company. Separate Accounts assets may be subject
to general claims of the Company only to the extent the value of such assets
exceeds Separate Accounts liabilities. At December 31, 2001 and 2000, the
Company's Separate Accounts assets exceeded Separate Accounts liabilities by
$6,632 and $6,763, respectively. This excess represents the Company's temporary
investment in certain Separate Accounts investment divisions that were made to
facilitate the establishment of those investment divisions.
Net investment income and net realized and unrealized gains (losses)
attributable to Separate Accounts assets accrue directly to contract owners and
are not reported as revenue in the Company's statements of earnings.
Assets and liabilities of Separate Accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract owners, are shown as separate captions in the balance sheets.
POLICYHOLDERS' ACCOUNT BALANCES: Liabilities for the Company's universal life
type contracts, including its life insurance and annuity products, are equal to
the full accumulation value of such contracts as of the valuation date plus
deficiency reserves for certain products. Interest-crediting rates for the
Company's fixed-rate products are as follows:
Interest-sensitive life products 4.00% - 4.85%
Interest-sensitive deferred annuities 1.00% - 7.40%
Immediate annuities 3.00% - 11.00%
These rates may be changed at the option of the Company after initial guaranteed
rates expire, unless contracts are subject to minimum interest rate guarantees.
CLAIMS AND CLAIMS SETTLEMENT EXPENSES: Liabilities for claims and claims
settlement expenses equal the death benefit (plus accrued interest) for claims
that have been reported to the Company but have not settled and an estimate,
based upon prior experience, for unreported claims. Additionally, the Company
has established a mortality benefit accrual for its variable annuity products.
INCOME TAXES: The results of operations of the Company are included in the
consolidated Federal income tax return of Merrill Lynch & Co. The Company has
entered into a tax-sharing agreement with Merrill Lynch & Co. whereby the
Company will calculate its current tax provision based on its operations. Under
the agreement, the Company periodically remits to Merrill Lynch & Co. its
current federal income tax liability.
The Company uses the asset and liability method in providing income taxes on all
transactions that have been recognized in the financial statements. The asset
and liability method requires that deferred taxes be adjusted to reflect the tax
rates at which future taxable amounts will be settled or realized. The effects
of tax rate changes on future deferred tax liabilities and deferred tax assets,
as well as other changes in income tax laws, are recognized in net earnings in
the period such changes are enacted. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Insurance companies are generally subject to taxes on premiums and in
substantially all states are exempt from state income taxes.
UNEARNED POLICY CHARGE REVENUE: Certain variable life insurance products contain
policy charges that are assessed at policy issuance. These policy charges are
deferred and amortized into policy charge revenue based on the estimated future
gross profits for each group of contracts. The Company records a liability equal
to the unamortized balance of these policy charges.
DERIVATIVES: On January 1, 2001, the Company adopted the provisions of SFAS No.
133, as amended, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). SFAS No.133 requires the Company to recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. At December 31, 2001, the fair value of derivatives
was immaterial. The accounting treatment for changes in fair value for
derivatives is dependent upon whether the derivative qualifies for hedge
accounting. As defined by SFAS No. 133, the Company does not have any
derivatives that qualify for hedge accounting and, as such, changes in fair
value of the Company's derivatives instruments are recorded in earnings. At
December 31, 2001, the change in fair value of derivatives did not have a
material impact on earnings.
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or amounts that approximate fair
value. The carrying value of financial instruments as of December 31 were:
2001 2000
--------------- ---------------
Assets:
Fixed maturity securities (1) $ 2,007,123 $ 2,012,016
Equity securities (1) 163,701 204,617
Trading account securities (1) 23,636 24,859
Limited partnerships (2) 11,270 10,413
Policy loans on insurance contracts (3) 1,194,478 1,193,690
Cash and cash equivalents (4) 130,429 92,730
Separate Accounts assets (5) 11,305,453 12,362,798
--------------- ---------------
Total financial instruments $ 14,836,090 $ 15,901,123
=============== ===============
(1) For publicly traded securities, the estimated fair value is determined
using quoted market prices. For securities without a readily
ascertainable market value, the Company utilizes pricing services and
broker quotes. Such estimated fair values do not necessarily represent
the values for which these securities could have been sold at the dates
of the balance sheets. At December 31, 2001 and 2000, securities without
a readily ascertainable market value, having an amortized cost of
$443,607 and $479,301, had an estimated fair value of $438,897 and
$469,397, respectively.
(2) The Company has investments in three limited partnerships that do not
have readily ascertainable market values. Management has estimated the
fair value as equal to cost based on the review of the underlying
investments of the partnerships.
(3) The Company estimates the fair value of policy loans as equal to the
book value of the loans. Policy loans are fully collateralized by the
account value of the associated insurance contracts, and the spread
between the policy loan interest rate and the interest rate credited to
the account value held as collateral is fixed.
(4) The estimated fair value of cash and cash equivalents approximates the
carrying value.
(5) Assets held in Separate Accounts are carried at the net asset value
provided by the fund managers.
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed maturity
securities and equity securities (excluding trading account securities) as of
December 31 were:
2001
--------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- -------------
Fixed maturity securities:
Corporate debt securities $ 1,807,398 $ 36,673 $ 41,417 $ 1,802,654
Mortgage-backed securities 69,216 3,246 30 72,432
U.S. Government and agencies 97,905 1,503 2,104 97,304
Foreign governments 18,739 263 765 18,237
Municipals 15,871 637 12 16,496
-------------- -------------- -------------- -------------
Total fixed maturity securities $ 2,009,129 $ 42,322 $ 44,328 $ 2,007,123
============== ============== ============== =============
Equity securities:
Non-redeemable preferred stocks $ 167,959 $ 1,479 $ 5,737 $ 163,701
============== ============== ============== =============
2000
--------------------------------------------------------------
Cost / Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
Fixed maturity securities:
Corporate debt securities $ 1,765,321 $ 14,566 $ 50,489 $ 1,729,398
Mortgage-backed securities 96,815 2,609 73 99,351
U.S. Government and agencies 147,648 721 3,227 145,142
Foreign governments 24,451 115 2,870 21,696
Municipals 16,098 339 8 16,429
-------------- -------------- -------------- --------------
Total fixed maturity securities $ 2,050,333 $ 18,350 $ 56,667 $ 2,012,016
============== ============== ============== ==============
Equity securities:
Non-redeemable preferred stocks $ 218,632 $ 501 $ 14,516 $ 204,617
============== ============== ============== ==============
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 2001 by contractual maturity were:
Estimated
Amortized Fair
Cost Value
----------------- -----------------
Fixed maturity securities:
Due in one year or less $ 280,072 $ 282,495
Due after one year through five years 873,873 883,759
Due after five years through ten years 478,164 469,448
Due after ten years 307,804 298,989
----------------- -----------------
1,939,913 1,934,691
Mortgage-backed securities 69,216 72,432
----------------- -----------------
Total fixed maturity securities $ 2,009,129 $ 2,007,123
================= =================
Fixed maturity securities not due at a single maturity date have been included
in the preceding table in the year of final maturity. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 2001 by rating agency equivalent were:
Estimated
Amortized Fair
Cost Value
----------------- -----------------
AAA $ 291,597 $ 294,516
AA 184,301 183,964
A 555,642 561,610
BBB 887,364 883,612
Non-investment grade 90,225 83,421
----------------- -----------------
Total fixed maturity securities $ 2,009,129 $ 2,007,123
================= =================
The Company has recorded certain adjustments to deferred policy acquisition
costs and policyholders' account balances in connection with unrealized holding
gains or losses on investments classified as available-for-sale. The Company
adjusts those assets and liabilities as if the unrealized holding gains or
losses had actually been realized, with corresponding credits or charges
reported in accumulated other comprehensive loss, net of taxes. The components
of net unrealized gains (losses) included in accumulated other comprehensive
loss at December 31 were as follows:
2001 2000
---- ----
Assets:
Fixed maturity securities $ (2,006) $ (38,317)
Equity securities (4,258) (14,015)
Deferred policy acquisition costs 3,706 19,257
Federal income taxes - deferred - 17,419
Separate Accounts assets (1,493) (353)
---------------- ----------------
(4,051) (16,009)
---------------- ----------------
Liabilities:
Federal income taxes - deferred (10,461) -
Policyholders' account balances 25,838 16,340
---------------- ----------------
15,377 16,340
---------------- ----------------
Stockholder's equity:
Accumulated other comprehensive loss $ (19,428) $ (32,349)
================ ================
The Company maintains a trading portfolio comprised of convertible debt and
equity securities. The net unrealized holdings gains (losses) on trading account
securities included in net realized investment gains (losses) were $462,
($3,614) and $3,112 at December 31, 2001, 2000 and 1999, respectively.
Proceeds and gross realized investment gains and losses from the sale of
available-for-sale securities for the years ended December 31 were:
2001 2000 1999
---- ---- ----
Proceeds $ 279,420 $ 143,373 $ 595,836
Gross realized investment gains 4,913 1,342 12,196
Gross realized investment losses (17,320) 4,319 15,936
The Company had investment securities with a carrying value of $25,859 and
$25,118 that were deposited with insurance regulatory authorities at December
31, 2001 and 2000, respectively.
Excluding investments in U.S. Government and Agencies, the Company is not
exposed to any significant concentration of credit risk in its fixed maturity
securities portfolio.
Net investment income arose from the following sources for the years ended
December 31:
2001 2000 1999
---- ---- ----
Fixed maturity securities $ 139,285 $ 155,664 $ 170,376
Equity securities 15,342 17,011 16,670
Real estate held-for-sale 924 3,375 3,792
Policy loans on insurance contracts 62,695 61,411 60,445
Cash and cash equivalents 7,578 7,504 7,955
Other 335 35 88
---------------- ---------------- ----------------
Gross investment income 226,159 245,000 259,326
Less investment expenses (4,287) (5,827) (5,491)
---------------- ---------------- ----------------
Net investment income $ 221,872 $ 239,173 $ 253,835
================ ================ ================
Net realized investment gains (losses), including other-than-temporary
writedowns in carrying value, for the years ended December 31 were as follows:
2001 2000 1999
---- ---- ----
Fixed maturity securities $ (12,035) $ (1,531) $ (3,721)
Equity securities (372) (1,446) (19)
Trading account securities (1,437) 2,275 4,778
Investment in Separate Accounts - 12 460
Real estate held-for-sale - 750 7,394
Cash and cash equivalents - (1) (17)
---------------- ---------------- ----------------
Net realized investment gains (losses) $ (13,844) $ 59 $ 8,875
================ ================ ================
NOTE 4. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income taxes based on
earnings before income taxes, computed using the Federal statutory tax rate,
versus the reported provision for income taxes for the years ended December 31:
2001 2000 1999
---- ---- ----
Provision for income taxes computed at Federal statutory rate $ 41,690 $ 65,150 $ 50,345
Increase (decrease) in income taxes resulting from:
Dividend received deduction (1,024) (1,758) (1,594)
Foreign tax credit (310) (2,930) (1,040)
Non-deductible fees 521 - -
--------------- -------------- ---------------
Federal income tax provision $ 40,877 $ 60,462 $ 47,711
=============== ============== ===============
The Federal statutory rate for each of the three years in the period ended
December 31, 2001 was 35%.
The Company provides for deferred income taxes resulting from temporary
differences that arise from recording certain transactions in different years
for income tax reporting purposes than for financial reporting purposes. The
sources of these differences and the tax effect of each are as follows:
2001 2000 1999
---- ---- ----
Deferred policy acquisition costs $ (2,336) $ 13,254 $ 8,822
Policyholders' account balances 19,520 2,589 (9,635)
Liability for guaranty fund assessments 630 1,624 (359)
Investment adjustments 61 (536) (27)
Other - - 64
------------- ------------ -------------
Deferred Federal income tax provision (benefit) $ 17,875 $ 16,931 $ (1,135)
============= ============ =============
Deferred tax assets and liabilities as of December 31 are determined as follows:
2001 2000
---- ----
Deferred tax assets:
Policyholders' account balances $ 93,658 $ 113,178
Investment adjustments 2,453 2,514
Liability for guaranty fund assessments 2,957 3,587
Net unrealized investment loss on investment securities 10,461 17,419
--------------- ----------------
Total deferred tax assets 109,529 136,698
--------------- ----------------
Deferred tax liabilities:
Deferred policy acquisition costs 119,472 121,808
Other 3,988 3,988
--------------- ----------------
Total deferred tax liabilities 123,460 125,796
--------------- ----------------
Net deferred tax asset (liability) $ (13,931) $ 10,902
=============== ================
The Company anticipates that all deferred tax assets will be realized; therefore
no valuation allowance has been provided.
NOTE 5. REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured life and to recover a portion of benefits paid by
ceding reinsurance to other insurance enterprises or reinsurers under indemnity
reinsurance agreements, primarily excess coverage and coinsurance agreements.
The maximum amount of mortality risk retained by the Company is approximately
$500 on single life policies and $750 on joint life policies.
Indemnity reinsurance agreements do not relieve the Company from its obligations
to policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company regularly evaluates the financial
condition of its reinsurers so as to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral under reinsurance
agreements in the form of letters of credit and funds withheld totaling $731
that can be drawn upon for delinquent reinsurance recoverables.
As of December 31, 2001 the Company had the following life insurance inforce:
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
-------------- -------------- -------------- --------------- -------------
Life insurance
inforce $14,036,930 $4,334,463 $1,128 $9,703,595 0.01%
The Company had entered into an indemnity reinsurance agreement with an
unaffiliated insurer whereby the Company coinsures, on a modified coinsurance
basis, 50% of the unaffiliated insurer's variable annuity premiums sold through
the Merrill Lynch & Co. distribution system. During 2001, the agreement was
amended whereby the Company ceased reinsuring variable annuity premiums sold
subsequent to June 30, 2001.
NOTE 6. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby MLIG has agreed
to provide certain accounting, data processing, legal, actuarial, management,
advertising and other services to the Company. Expenses incurred by MLIG in
relation to this service agreement are reimbursed by the Company on an allocated
cost basis. Charges billed to the Company by MLIG pursuant to the agreement were
$50,575, $47,732 and $43,410 for the years ended December 31, 2001, 2000 and
1999, respectively. Charges attributable to this agreement are included in
insurance expenses and taxes, except for investment related expenses, which are
included in net investment income. The Company is allocated interest expense on
its accounts payable to MLIG that approximates the daily Federal funds rate.
Total intercompany interest incurred was $639, $850 and $688 for 2001, 2000 and
1999, respectively. Intercompany interest is included in net investment income.
While management believes that these fees are calculated on a reasonable basis,
they may not necessarily be indicative of the costs that would have been
incurred on a stand-alone basis.
The Company and Merrill Lynch Investment Managers, L.P. ("MLIM") are parties to
a service agreement whereby MLIM has agreed to provide certain invested asset
management services to the Company. The Company pays a fee to MLIM for these
services through the MLIG service agreement. Charges attributable to this
agreement and allocated to the Company by MLIG were $1,990, $2,042 and $1,823
for 2001, 2000 and 1999, respectively.
MLIG has entered into agreements with MLIM and Mercury Advisors ("Mercury"), a
division of MLIM and formerly known as Hotchkis & Wiley, with respect to
administrative services for the Merrill Lynch Series Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., and Mercury HW Variable Trust, formerly known as
Hotchkis & Wiley Variable Trust (collectively, "the Funds"). The Company invests
in the various mutual fund portfolios of the Funds in connection with the
variable life insurance and annuity contracts the Company has inforce. Under
this agreement, MLIM and Mercury pay compensation to MLIG in an amount equal to
a portion of the annual gross investment advisory fees paid by the Funds to MLIM
and Mercury. The Company received from MLIG its allocable share of such
compensation in the amount of $21,667, $23,269 and $21,630 during 2001, 2000 and
1999, respectively. Revenue attributable to these agreements is included in
policy charge revenue.
The Company has a general agency agreement with Merrill Lynch Life Agency Inc.
("MLLA") whereby registered representatives of MLPF&S, who are the Company's
licensed insurance agents, solicit applications for contracts to be issued by
the Company. MLLA is paid commissions for the contracts sold by such agents.
Commissions paid to MLLA were $65,021, $94,841 and $88,955 for 2001, 2000 and
1999, respectively. Substantially all of these commissions were capitalized as
deferred policy acquisition costs and are being amortized in accordance with the
policy discussed in Note 1.
Affiliated agreements generally contain reciprocal indemnity provisions
pertaining to each party's representations and contractual obligations
thereunder.
NOTE 7. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
The Company paid no dividends in 2001. During 2000 and 1999, the Company paid
cash dividends to MLIG of $65,000 and $135,000, respectively. Of these cash
dividends, $38,482 and $105,793, respectively, were extraordinary dividends as
defined by Arkansas Insurance Law and were paid pursuant to approval granted by
the Arkansas Insurance Commissioner. The Company also paid a $500 stock dividend
to MLIG during 1999.
At December 31, 2001 and 2000, approximately $30,899 and $25,020, respectively,
of stockholder's equity was available for distribution to MLIG. Statutory
capital and surplus at December 31, 2001 and 2000, were $311,490 and $252,704,
respectively.
Applicable insurance department regulations require that the Company report its
accounts in accordance with statutory accounting practices. Statutory accounting
practices differ from principles utilized in these financial statements as
follows: policy acquisition costs are expensed as incurred, future policy
benefit reserves are established using different actuarial assumptions,
provisions for deferred income taxes are limited to temporary differences that
will be recognized within one year, and securities are valued on a different
basis. The Company's statutory net income for 2001, 2000 and 1999 was $48,108,
$49,533 and $106,266, respectively.
On January 1, 2001, the Company adopted the Codification of Statutory Accounting
Principles ("Codification"). The purpose of Codification is to standardize
regulatory accounting and reporting for the insurance industry. However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices. The Company's state of domicile has adopted
Codification. The impact of adopting Codification resulted in a $4,779 increase
in statutory surplus.
The National Association of Insurance Commissioners ("NAIC") utilizes the Risk
Based Capital ("RBC") adequacy monitoring system. The RBC calculates the amount
of adjusted capital that a life insurance company should have based upon that
company's risk profile. As of December 31, 2001 and 2000, based on the RBC
formula, the Company's total adjusted capital level was in excess of the minimum
amount of capital required to avoid regulatory action.
NOTE 8. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers who are licensed
to transact business within a state become members of the state's life insurance
guaranty association. These associations have been established for the
protection of policyholders from loss (within specified limits) as a result of
the insolvency of an insurer. At the time an insolvency occurs, the guaranty
association assesses the remaining members of the association an amount
sufficient to satisfy the insolvent insurer's policyholder obligations (within
specified limits). The Company has utilized public information to estimate what
future assessments it will incur as a result of insolvencies. At December 31,
2001 and 2000, the Company has established an estimated liability for future
guaranty fund assessments of $8,449 and $10,250, respectively. The Company
regularly monitors public information regarding insurer insolvencies and adjusts
its estimated liability as appropriate.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
During 2000, the Company committed to participate in a limited partnership. As
of December 31, 2001, $3,220 has been advanced towards the Company's $10,000
commitment to the limited partnership.
NOTE 9. SERVICE CENTER INTEGRATION
During the second quarter 2001, the Company announced plans to consolidate its
life and annuity policy administration service centers into one location. The
consolidation was completed during the third quarter 2001. Costs incurred
related to the consolidation were $10.7 million and are reported in insurance
expenses and taxes. At December 31, 2001, costs incurred and unpaid were $6.0
million.
NOTE 10. SEGMENT INFORMATION
In reporting to management, the Company's operating results are categorized into
two business segments: Life Insurance and Annuities. The Company's Life
Insurance segment consists of variable life insurance products and
interest-sensitive life insurance products. The Company's Annuity segment
consists of variable annuities and interest-sensitive annuities. The accounting
policies of the business segments are the same as those described in the summary
of significant accounting policies. All revenue and expense transactions are
recorded at the product level and accumulated at the business segment level for
review by management. The "Other" category, presented in the following segment
financial information, represents net revenues and earnings on assets that do
not support life or annuity contract owner liabilities.
The following table summarizes each business segment's contribution to the
consolidated amounts:
Life
2001 Insurance Annuities Other Total
--------------- ---------------- ------------- ---------------
Net interest spread (a) $ 34,815 $ 31,302 $ 2,644 $ 68,761
Other revenues 101,685 139,727 (1,419) 239,993
--------------- ---------------- ------------- ---------------
Net revenues 136,500 171,029 1,225 308,754
--------------- ---------------- ------------- ---------------
Policy benefits 21,320 16,453 - 37,773
Reinsurance premium ceded 24,531 4 - 24,535
Amortization of deferred policy
acquisition costs 30,913 28,422 - 59,335
Other non-interest expenses 18,097 49,899 - 67,996
--------------- ---------------- ------------- ---------------
Total non-interest expenses 94,861 94,778 - 189,639
--------------- ---------------- ------------- ---------------
Net earnings before Federal income
tax provision 41,639 76,251 1,225 119,115
Income tax expense 15,607 24,841 429 40,877
--------------- ---------------- ------------- ---------------
Net earnings $ 26,032 $ 51,410 $ 796 $ 78,238
=============== ================ ============= ===============
Balance Sheet Information:
Total assets $ 5,674,704 $ 9,625,104 $ 150,208 $ 15,450,016
Deferred policy acquisition costs 251,245 219,693 - 470,938
Policyholder liabilities and accruals 2,094,195 1,256,616 - 3,350,811
Other policyholder funds 9,236 5,003 - 14,239
Life
2000 Insurance Annuities Other Total
--------------- ---------------- ------------- ---------------
Net interest spread (a) $ 38,265 $ 27,199 $ 9,493 $ 74,957
Other revenues 107,030 160,955 326 268,311
--------------- ---------------- ------------- ---------------
Net revenues 145,295 188,154 9,819 343,268
--------------- ---------------- ------------- ---------------
Policy benefits 20,371 1,245 - 21,616
Reinsurance premium ceded 23,913 - - 23,913
Amortization of deferred policy
acquisition costs 5,025 48,498 - 53,523
Other non-interest expenses 16,656 41,417 - 58,073
--------------- ---------------- ------------- ---------------
Total non-interest expenses 65,965 91,160 - 157,125
--------------- ---------------- ------------- ---------------
Net earnings before Federal
income tax provision 79,330 96,994 9,819 186,143
Income tax expense 26,362 30,663 3,437 60,462
--------------- ---------------- ------------- ---------------
Net earnings $ 52,968 $ 66,331 $ 6,382 $ 125,681
=============== ================ ============= ===============
Balance Sheet Information:
Total assets $ 6,175,339 $ 10,285,993 $ 82,178 $ 16,543,510
Deferred policy acquisition costs 277,408 216,680 - 494,088
Policyholder liabilities and accruals 2,133,700 1,373,846 - 3,507,546
Other policyholder funds 11,243 6,435 - 17,678
Life
1999 Insurance Annuities Other Total
--------------- ---------------- ------------- ---------------
Net interest spread (a) $ 36,805 $ 31,098 $ 10,093 $ 77,996
Other revenues 94,821 140,541 6,542 241,904
--------------- ---------------- ------------- ---------------
Net revenues 131,626 171,639 16,635 319,900
--------------- ---------------- ------------- ---------------
Policy benefits 16,569 16,414 - 32,983
Reinsurance premium ceded 21,691 - - 21,691
Amortization of deferred policy
acquisition costs 22,464 43,143 - 65,607
Other non-interest expenses 16,728 39,049 - 55,777
--------------- ---------------- ------------- ---------------
Total non-interest expenses 77,452 98,606 - 176,058
--------------- ---------------- ------------- ---------------
Net earnings before Federal
income tax provision 54,174 73,033 16,635 143,842
Income tax expense 18,442 23,447 5,822 47,711
--------------- ---------------- ------------- ---------------
Net earnings $ 35,732 $ 49,586 $ 10,813 $ 96,131
=============== ================ ============= ===============
Balance Sheet Information:
Total assets $ 6,492,686 $ 10,523,453 $ 101,910 $ 17,118,049
Deferred policy acquisition costs 251,017 224,898 - 475,915
Policyholder liabilities and accruals 2,150,671 1,522,892 - 3,673,563
Other policyholder funds 18,345 6,750 - 25,095
(a) Management considers investment income net of interest credited to
policyholders' account balances in evaluating results.
The table below summarizes the Company's net revenues by product for 2001, 2000
and 1999:
2001 2000 1999
------------- ------------ ------------
Life Insurance
Variable life insurance $ 110,842 $ 116,664 $ 104,036
Interest-sensitive life insurance 25,658 28,631 27,590
------------- ------------ ------------
Total Life Insurance 136,500 145,295 131,626
------------- ------------ ------------
Annuities
Variable annuities 152,427 154,200 130,039
Interest-sensitive annuities 18,602 33,954 41,600
------------- ------------ ------------
Total Annuities 171,029 188,154 171,639
------------- ------------ ------------
Other 1,225 9,819 16,635
------------- ------------ ------------
Total $ 308,754 $ 343,268 $ 319,900
============= ============ ============
* * * * *